China’s holiday greetings: a 25 basis point rate hike

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.”


India continues to fight inflation

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.”

From today’s statement:

“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.”

Inflation in India continues unabated

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?

Prices continue to accelerate in India

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.

Inflation threat rises in South Asia

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.

What a difference five months makes. Now both inflation and inflationary expectations are rising fast.  As India Knowledge@Wharton noted:

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 on Inflation Watch in Asia

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.

Wow. Just wow.

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”

“Inflation [in India] is poised to shoot through the roof.”

Lombard Street Research Ltd. joins Nomura in sounding the alarm over inflation in India.  Bloomberg News reports:

India may need “assertive” monetary tightening to control inflation similar to the steps taken by former U.S. Federal Reserve chairman Paul Volcker in the early 1980s, according to Lombard Street Research Ltd. “India could soon need Volcker’s policy,” Maya Bhandari, a senior economist at Lombard Street in London, said in a report. “Inflation is poised to shoot through the roof.”

Consumer price gains in India “aren’t far off” the levels seen in the U.S. as Volcker took the helm at the Fed, Bhandari said. Volcker pushed the federal funds rate to as high as 20 percent to throttle inflation, which peaked at 14.8 percent in March 1980. The Reserve Bank of India could find itself forced to adopt Volcker-like policies to curb “serious and growing” inflationary pressures, Lombard Street said in the report.

China Tries to Gain Better Control Over Increasing Bills for Commodities

The Wall Street Journal reports: “China Targets Commodity Prices by Stepping Into Futures Markets.”

Apparently, China is worried enough about increasing prices in various commodities that it is trying to fight back by creating more of its own futures markets. For example, speculators in commodities may drive up prices in anticipation of Chinese consumption patterns. Chinese officials hope that by having their own futures exchanges, they can generate prices that are more closely tied to Chinese supply and demand dynamics. This is important given China is a significant player in many commodities. The WSJ indicates that “China buys 10% of all crude oil, 30% of copper output and 53% of the world’s soybeans.” Additionally, “the 165 million contracts in white sugar that changed hands on the Zhengzhou Commodity Exchange last year made it the most-active commodity future anywhere.” China’s next target is a an oil futures market given it spent $160B on oil last year.

Given that China remains a communist country “in transition,” I wonder whether China creates these markets as mechanisms for allowing the government more direct controls over pricing. Indeed, the WSJ states: “…the big footprints in China’s futures markets belong to state-owned groups, primarily commodity trader Cofco Corp. and Beijing’s secretive stockpiling agent, the State Bureau of Material Reserve.”

Buyer beware.

Inflation picking up steam in Argentina

The Wall Street Journal reports:

Argentina’s inflation in September continued to clip along at a sharp pace … According to [think tank] Buenos Aires City, inflation picked up sharply during the third quarter, posting a 16% annual increase following a slowdown to a 10% gain during the second quarter.

Nomura: Inflation to surge in India

Nomura forecasts big increases in consumer and wholesale prices in India, Reuters reports:

“We believe that the economy is in the early stages of an inflation pick-up. With input cost pressures building and domestic demand in recovery mode, output prices should follow suit,” Sonal Varma, economist at Nomura, wrote…. Nomura revised its average inflation forecast for 2009/10 to 3 percent from 2 percent and for 20010/11 to 6.8 percent from 5.7 percent. It also revised its consumer price inflation estimate for 2009/10 to 10.8 percent for FY10 and 6.8 percent for FY11.

In a separate article, the Wall Street Journal noted that prices are rising not only in India, but also in South Korea and Indonesia:

While the West still worries about the ravages of deflation, emerging markets in Asia are beginning to contemplate what to do about the opposite problem: inflation.New figures released Thursday from Korea, Indonesia and India all show prices increasing, a sign that these economies have turned the corner and beaten deflationary pressures for now. It also confirms the likelihood that those countries will be among the first to raise interest rates as soon as this year.

After a larger-than-expected increase in wholesale prices Thursday, India’s finance minister, Pranab Mukherjee, warned “there is inflationary potentiality and inflation may go up further,” he said. “When it goes up it is a matter of concern….”

[T]he latest data confirm that Asian central bankers have to start thinking about applying the brakes to prevent economies from overheating. Interest rates in most countries are at record low levels and need to rise sharply to get back to levels associated with average growth rates.“Clearly the period of falling inflation is over for emerging markets,” says UBS economist Jonathan Anderson. “We are at the inflection point.”