Monday, Sep 13, 2010
Even china is expected to fight inflation, you listening Mervy
CNN Money: China's inflation battle intensifies
There is little the Chinese policymakers can do to control food prices other than provide subsidies, said Virendra Singh, director in international economics for Moody's Economy.com.
But he said there is concern that rising food prices could spill over to the rest of the economy as workers demand higher wages.
So his firm is expecting the People's Bank of China to move soon to raise interest rates.
In fact, the August price report got particular attention when China moved up the release of the data by two days, prompting some to speculate the move was done to give financial markets a chance to digest the news and possibly open the way for the People's Bank of China the chance to raise interest rate
Posted by mark @ 11:24 AM (520 views) Add Comment
6 Comments
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1. uncle tom said...
So naive that they believe China's official stats..
..try going to China, trying talking to ordinary Chinese people about prices (especially food..) - inflation is rocketing there..
2. mark said...
UT the same goes for UK..
3. jack c said...
Well the inflation/deflation debate moves on yet again - this from todays FT
Philip Coggan: Fortunes will be won and lost
The markets are here to torment us. All along, one has had the feeling that the debt crisis could have only two conclusions – a deflationary bust that wipes out debtors or an inflationary surge that wipes out creditors.
But which outcome will occur? Watch the bond markets this year and the answer seems clear – deflation. By the end of August, US Treasury bonds had outperformed the S&P 500 by 20 percentage points since the start of 2010. In the UK, gilt yields are less than 3 per cent, a level not seen since 1946. In both cases, this is in spite of a flood of new issuance. That suggests investors have no worries about inflation at all. Turn, however, to the commodities markets. As of September 3, the S&P Agricultural index was up by 34 per cent since the start of June. A Russian ban on wheat exports, global meat prices at a 20-year high, cotton prices at a 15-year high; the list of bad news seems to go on and on. Gold, that traditional harbinger of inflationary pressures, is hovering at the $1,250 an ounce level.
Commodities boom - The commodities boom can be explained by specific factors such as a drought in Russia and floods elsewhere. This may be the simple variability of weather patterns or it may be an indication that global warming will play havoc with crop production. The commodity that investors tend to worry most about – oil – has not taken part in the rally and remains only half its peak 2008 level. Nevertheless, the surge in food prices does reflect the continuing rise in emerging market demand. The western economies may be trapped in a cycle of sluggish growth but India and China, home to more than a third of the world’s population, are expanding at 8-10 per cent a year. That creates a lot of demand for food. So why aren’t the bond markets more worried? It is important to distinguish between a rise in relative prices and in the absolute price level. For western nations, food these days is only a small part of the budget. If food prices go up, that will simply give consumers less money to spend on other stuff like manufactured goods or services. To the extent that western nations are food importers, a rise in meat and grain prices simply acts as a tax. And a tax rise is deflationary for an economy. The overall level of inflation remains low. Core inflation in the US is just 1 per cent and the ‘trimmed mean’ of the index, which has a lower weighting for rents, is running at just 0.5 per cent. It seems clear central banks will keep short-term rates at 1 per cent or below for an extended period, at least well into 2011. Given that background, a longer-dated bond yield of 2-3 per cent does not look such a bad deal.
Long-term fears - The strength of gold is harder to explain. But the rationale may be that, while investors do not expect to see widespread inflation in the short-term, they do worry about it in the long term. Governments are running huge fiscal deficits, printing money to deal with the crisis and attempting to depreciate their currencies to gain market share for their exporters. Historically, such policies have eventually led to inflation. So the dilemma for investors remains. In the near term, the deflationary forces look the strongest which is why bond yields could fall even further. But there is a real risk in the medium term that inflation could take off. At some point, bonds will look a terrible bargain and investors rush for the exits.
Philip Coggan is Buttonwood columnist for The Economist
SOURCE http://www.ftadviser.com/InvestmentAdviser/Investments/AssetClass/Commodities/Comment/article/20100913/088b3338-b9b6-11df-903e-00144f2af8e8/Philip-Coggan-Fortunes-will-be-won-and-lost.jsp
4. Crunchy said...
'There is little the Chinese policymakers can do to control food prices other than provide subsidies,'
Again.."Hyperinflation food shortages, I'm getting warmer."
The fool on the hill.
5. uncle tom said...
Jack c,
This echoes what I posted a day or two ago - that the money tied in government bonds is only really there as a defensive investment, and a very poor investment at that.
If money starts to be taken out of govt stock, and prices fall, while at the same time money is put into commodities and equities; a trickle could turn into a flood, leading to runaway commodity prices, and a bull run on the stock markets.
The upshot is that central banks would be forced to either raise rates to attract investment, or indulge further cash creation. This would be choosing between the devil and the deep blue - raise rates and any economic recovery gets crushed, or print money and see your currency go down the pan, and inflation take off.
The fear of market meltdown that originally drove funds into govt bonds is subsiding, while the fear that those bonds may lose a substantive part of their value before they redeem should be in the ascent.
To my mind the stage is set for a period of inflation - one borne first of rising commodity prices, followed by a loss of confidence in currency.
6. jack c said...
uncle tom
Thanks for the response/input - my thoughts (for what they are worth) are short term inflation subsequently followed by deflation.
A couple of other fresh articles from todays fundstrategy worth looking at are
(1) Less fizz, but bonds may still go pop - this includes a quote “Mervyn King’s obligatory writing to the Chancellor to explain the failure to keep inflation down has reached embarrassing levels”
Full article @ www.fundstrategy.co.uk/opinion/patrick-collinson/less-fizz-but-bonds-may-still-go-pop/1018262.article
(2) American bear prepares for the dollar’s collapse - Peter Schiff, the president of Euro Pacific Capital, talks to Neal Underwood about his fears for the economy.
Full article @ www.fundstrategy.co.uk/features/qa/american-bear-prepares-for-the-dollar’s-collapse/1018255.article