Asian inflation may finally be cooling

Thanks to improvements in crop production, monetary tightening, a slowdown in economic growth rates, and currency appreciation, the trend now appears to be heading down for core and headline inflation in Asia. Different countries are wrestling with different problems, but, overall, economists and analysts quoted in “Food Inflation Begins to Moderate in Asia” seem to be getting optimistic about the prospects for inflation.

The article includes some statistics on the huge difference in price trends on various food items in India:

“The cost of bananas in New Delhi is up 50 percent over the year, while paneer – a form of cottage cheese – has risen 26 percent to 145 rupees per kg.

Yet other food prices are falling. Staples such as tomatoes and potatoes, which peaked earlier in the year at levels that caused great stress to poorer families, have seen prices moderate in recent weeks.”

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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.”


Indian steel prices continue to soar in 2010

The increasing costs of coking coal and iron ore are driving the price of steel ever upward. In India, steel prices have increased for the third time this year. The Hindu Business Times reports:

“According to industry observers, mining firms are entering into supply contracts with steel makers for the April-June quarter at about $110-120 a tonne, which is an increase of 80-100 per cent from the levels of 2009-10 annual contracts.”

Apparently, these latest price increases are leading to price hikes in consumer goods and construction that rely on steel-based inputs. However, Steel Minister Virbhadra Singh is not worried about inflationary pressures:

“‘There has been a spurt in steel prices in the domestic market recently but it is a temporary phenomenon and at present there is no inflationary concern.’”


Sugar prices continue to plunge

At the end of 2009, we noted that sugar prices were soaring to multi-decade highs. Sugar prices proceeded to peak at the end of January and have plunged 33% from there.

Sugar prices continue to plunge from multi-decade highs

Sugar prices continue to plunge from multi-decade highs

Sugar prices are riding a rollercoaster of scarcity and abundance. Monsoons in India forced the world’s largest consumer of sugar to import it. This year, sugar crops are expected to produce a large bounty from India and Brazil. See “Indian sugar stocks turn bitter as output seen rising” for more details.


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.