Monday, 13 August 2007

Inflation update

Inflation reaches 10 year high. Remember when reading these stories that the data tend to be unreliable. My guess is that inflation is being understated if anything.

We have posted previously on food price inflation which is a worry for the poor in China. The government will be watching carefully - civil unrest would not be welcome. I am not sure why Bloomberg see bring up 1989 in this article but it shows the debate that economists are currently having.

Inflation is important and China may well export it around the world. However, China's vast pool of labour should help restrain wage inflation.

China's Inflation Rate Jumps to Highest in 10 Years

Aug. 13 (Bloomberg) -- Inflation in China, the world's fastest-growing major economy, accelerated to the highest rate in more than 10 years, fueling speculation that the government may raise borrowing costs for a fourth time in 2007.

Consumer prices jumped 5.6 percent in July from a year earlier, after gaining 4.4 percent in June, the National Bureau of Statistics said today. That beat the 4.6 percent median estimate of 17 economists surveyed by Bloomberg News.

Food costs climbed 15.4 percent after a shortage of pigs pushed up meat prices and bad weather destroyed crops. The central bank is concerned that food inflation will spread, overheating an economy forecast to contribute more to global growth than the U.S. this year.

``It's still mainly a food-price phenomenon, but the central bank will continue to be worried,'' said Huang Yiping, chief Asia economist at Citigroup Inc. in Hong Kong. ``We expect another interest-rate hike this year and one more increase in the reserve ratio for banks.''

The yield on the benchmark 10-year government bond rose 0.03 percentage point to 4.34 percent at 3:27 p.m. in Shanghai. The benchmark CSI 300 Index of stocks closed 0.1 percent lower.

The official China Securities Journal said last week that the inflation rate would probably be 5.6 percent, citing unidentified people. The central bank said on Aug. 8 that consumer-price gains aren't solely from ``temporary factors.''

Interest-Rate Increase

China's economy, the world's fourth largest, expanded 11.9 percent in the second quarter from a year earlier, the fastest pace in more than 12 years, on exports and investment. Cash from record overseas sales raises inflation risks.

``With this massive headline number, plus evidence of heightening concern of the central bank, the chances of another rate hike soon are very high,'' said Stephen Green, senior economist at Standard Chartered Bank Plc in Shanghai.

The 3.5 percent rate for the first seven months is above the central bank's target ceiling for the year of 3 percent.

Economists are split on the risk posed by consumer prices.

Liang Hong, at Goldman Sachs Group Inc. in Hong Kong, has said inflation is entering a ``perilous zone'' and today predicted ``decisive tightening measures.''

``China's inflation is getting out of control and the government is behind the curve,'' Tao Dong, chief Asia economist at Credit Suisse Group in Hong Kong, said in a July 30 note.

Others say the jump in prices is temporary and contained. Non-food inflation slowed to 0.9 percent in July from at least 1 percent in each of the previous five months.

Meat, Eggs

Inflation remains almost entirely food-driven and is likely to drop rapidly ``once supply disruptions have worked themselves out,'' Julian Jessop and Mark Williams, economists at Capital Economics Ltd. in London, wrote in a note.

Food accounts for a third of the consumer-price index. Meat costs surged 45 percent last month from a year earlier and egg prices climbed 31 percent.

China may use administrative measures such as food-price regulation to curb inflation, said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong.

Central banks globally are battling inflation as surging world growth forces up food and commodity prices.

Australia's central bank today raised its inflation forecast for this year to 3 percent from 2.5 percent, a week after increasing the benchmark interest rate to an 11-year high.

U.S. Inflation

Consumer prices rose 2.7 percent in the U.S. in June from a year earlier and 2.4 percent in the U.K. In India, the inflation rate was 4.45 percent in the last week of July.

Besides raising the benchmark one-year lending rate to 6.84 percent, the central bank has ordered commercial banks to set aside larger reserves on six occasions this year.

Wage gains, energy costs and expectations of price increases have broadened inflation pressures, the People's Bank of China said last week. Economic indicators are at ``alarming'' levels, the China Securities Journal today quoted Zhang Tao, the central bank's deputy international chief, as saying.

The central government has told officials in regions where inflation has surged to refrain from raising prices this year. It's ordered investigations into price-fixing after complaints about instant-noodle and fast-food costs.

The government may be balancing higher food costs and the risk of increased expectations for inflation against the benefit of improved farmers' incomes, according to Capital Economics.

Tiananmen Square

``This is a delicate calculation: high inflation fueled the anger which culminated in the 1989 Tiananmen protests,'' wrote Williams and Jessop. The army sent tanks and soldiers to clear democracy protestors from Tiananmen Square in Beijing on June 4, 1989, killing as many as 1,000 people, by some accounts.

Inflation has outstripped returns on bank savings. That has encouraged households to switch money to a stock market that the government is trying to cool.

Household savings fell in July by 9.1 billion yuan ($1.2 billion) from the previous month. The CSI 300 Index has climbed 133 percent this year.

China will overtake the U.S. this year as the largest contributor to global growth, according to the International Monetary Fund. The IMF forecasts the nation will account for 15.6 percent of the expansion, versus 15.4 percent for the U.S.

Foreign Direct Investment reaches 12 year high

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