China’s scramble to battle inflation continues. On Saturday, Christmas Day in many parts of the world, the People’s Bank of China raised interest rates 25 basis points. The benchmark one-year lending rate is now 5.81%, and the one-year deposit rate is set to 2.75%. More details and analyst commentary on Bloomberg: “China Increases Interest Rates to Curb Its Fastest Inflation in Two Years.”
The Reserve Bank of India (RBI) hiked interest rates more than expected by 25 basis points to 6%.
The RBI has a laser focus on keeping inflation expectations contained. Although inflation seems to have peaked, the RBI remains worried that it needs to “…end the prevalence of negative real interest rates.”
“Inflation remains the dominant concern in macroeconomic management…inflation rates have reached a plateau, but are likely to remain at unacceptably high levels for some months. While prices of food articles, which according to the new series, rose by over 14 per cent in August, are still contributing to the pressure, about two-thirds of the August inflation can be attributed to items other than food articles and products. Notwithstanding slight moderation in August 2010, the headline inflation remains significantly above the trend of 5.0–5.5 per cent in the 2000s. There is, therefore, need for continued policy response to contain inflation and anchor inflationary expectation.”
Food prices in the world’s second-largest country are up 19.95 percent from last year. Opposition protests are growing:
Opposition lawmakers yesterday accused the government of being ineffective in tackling soaring food prices and disrupted parliament, forcing the speaker of the lower house to adjourn for the day.
Look for India’s central bank to raise interest rates after its next meeting in January 2010.
Exit question: Will rising inflation in India have any effect on the inflation rate in other countries?
The monthly inflation rate in India increased to a 10-month high of 4.78% during November, against just 1.34% in October, according to The Times of India. Economists attribute the increase to a jump in food prices. More on inflation in South Asia here.
Just five months ago, inflation in India seemed to be well under control. On June 11, Bloomberg reported that Indian wholesale prices had increased just 0.13 percent in the last week of May. That was the lowest rate of inflation in 30 years.
The IMF, which in March 2009 projected inflation of just 2% for the fiscal year ending March 2010, now sees inflation at 8.7% for the calendar year of 2009. In October, its Regional Economic Outlook warned: “In India … industrial production is recovering rapidly, and core inflation and inflation expectations are rising.”
India, of course, is the region’s largest and most geopolitically important country. But according to AFP, it’s not just India that has experienced an abrupt increase in inflation. The entire south Asia region is under siege:
In the third quarter of 2009, inflation in South Asia, which aside from the Maldives comprises India, Pakistan, Nepal, Bangladesh, Afghanistan, Sri Lanka and Bhutan, hit an average 10.9 percent, the World Bank said.
The biggest cause: skyrocketing food prices. In India, for example, the price of sugar has increased 45.7 percent from last year. The price of potatoes is up 96.4 percent. The price of onions: up 37.6 percent.
Another cause: rising electricity prices. In Pakistan, a restaurant owner claims his electricity bill has doubled since General Pervez Musharraf was forced to resign just over a year ago.
Not surprisingly, the middle class has noticed. As AFP notes, higher prices for basic staples like food and energy are increasing dissatisfaction with a Pakistani government that had already been unstable:
In a country with huge disparity in wealth, life has always been a struggle for the third of the population that lives below the poverty line but now lower-middle class and professional families find it increasingly difficult to make ends meet.
The rupee has depreciated by 35 percent in the last year while electricity, gas and petrol prices have doubled in the last two. The country faces a crippling energy crisis, producing only 80 percent of its power needs, causing debilitating blackouts and suffocating industry.
Price hikes and shortages of essential items such as sugar and flour complicate housekeeping and exacerbate the rock-bottom unpopularity of President Asif Ali Zardari, head of the Pakistan People’s Party (PPP).
The experience of India, Pakistan, and other south Asian countries offers two helpful reminders. First, when inflation arrives on the scene, it can spiral out of control more quickly than just about anyone expects. Second, inflation is not just an economic problem, but also a political one.
World Bank President Robert Zoellick is wary of heightened inflation risks in Asia as stimulus programs, easy monetary policies, and asset flows into commodities drive recoveries across the region:
“…in Asia the massive liquidity flowing into regional markets could push asset prices up dangerously high, Zoellick told a business forum on the sidelines of the Asia-Pacific Economic Cooperation forum. ‘In this region some care must be taken because as we get recoveries … we could see inflation or some flow into commodities markets or certain asset price markets,’ Zoellick said.”
(See “World Bank president: inflation a risk to recovery” for more.)
Related (from writejesse): “Taipei’s residential prices may rise 15 percent in 2010.“
The Wall Street Journal says a manic buying frenzy is underway in Asian real estate:
In Hong Kong, high-end real-estate prices are soaring. A luxury flat in the tony Midlevels district is expected to sell for US$55.6 million, or $9,200 a square foot, said developer Henderson Land Development Co. Elsewhere, a bidder at a city-run auction to operate food stands at February’s Lunar New Year celebration recently paid a record US$63,225 for the right to occupy a 400-square-foot stall to sell fish balls and other snacks. Prices in the auction of 180 stalls were up 33% from 2008.
Over the summer, a Singapore condominium developer raised prices 5% the day before units went on sale. After dozens of would-be buyers lined up on a steamy night, the developer — a joint venture of Hong Leong Group and Japan’s Mitsui Fudosan — held a lottery for a chance to bid on the units. Singapore home prices rose 15.8% in the third quarter, the fastest rate in 28 years.
Shanghai-based business owner Todd Fleckenstein posts this remark in the comments section of the WSJ article:
Two weeks ago a limited number of villas went on sale here in Shanghai at RMB 77,000 m sq. or roughly $11,325 m sq. or $1,030 f sq. Absolutely insane. That’s $3.4m for 3300 f sq. villas. They are rickety, poorly constructed homes that will not last 25 years. I have walked through them several times and they sit on on postage stamp sized lots 15 km outside the city. 11 were sold on the first day. I would honestly value them at less than 20% of the amounts being paid….
Related: “Hong Kong Faces Property Bubble Explosion as Home Prices Rise 28% This Year”