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Inflation In The Near East


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Rising Asian inflation is a well-known problem. The high weightings of food and oil in consumption have been a big factor in driving the Asia ex-Japan inflation rate from 3% in the middle of last year to more than 6% today, according to UBS. The determination of many Asian governments to peg, or manage, their exchange rates has led to inappropriately loose monetary policy; real interest rates, according to UBS, are currently minus 2%.

But what has attracted less attention is the inflation problem in eastern Europe. Headline inflation is 15% in Russia, around the same rate as Bulgaria, 18% in Latvia and a remarkable 30% in the Ukraine. Even in countries where prices are not rising that fast, Capital Economics points out that wage growth is often very rapid; 9.5% in Slovakia, more than 10% in the Czech republic and 10.5% in Poland. In the Baltics, which look a complete mess, wage growth is running at 20-30%.

Monetary policy in the region is distinctly mixed. Some countries, like Poland, have positive real rates but others are ridiculously loose; in Ukraine, credit growth has been 80% over the last 12 months, according to Capital Economics.

This has two consequences for investors. The first is that the image of emerging markets as model economic citizens, which has been built up carefully over the decade since the Asian crisis, is a flawed one. They have indeed improved their economic performance in aggregate, pushing up GDP growth and reducing their dependence on foreign capital. But having tackled the problems that caused the late 1990s bust, they are now facing the concerns that arise from a prolonged boom.

Economic overheating is a very difficult issue to tackle, as developed countries found in the 1960s and 1970s. While workers are getting jobs and getting wage increases, governments are very reluctant to slam on the brakes. Often, they try to get round the problem of inflation by price controls, which simply create a new set of distortions. Forcing interest rates sharply higher, as Paul Volcker famously did between 1979 and 1982, is usually only possible if independent bankers, not politicians, are in charge.

There may be a particular problem in eastern Europe in that most countries have less than 20 years experience of grappling with any kind of free-market economy. It is hardly surprising that they struggle to cope. Whatever the reason, investors face the danger that governments will not control inflation, a tendency that will eventually lead to a currency crisis (even without one, stockmarket valuations traditionally fall when inflation rises). Alternatively, governments will crack down too hard, leading to recession and a collapse in profits.

We've had over 200 years experience and look at the mess where in!!!!! It seems our former communist friends have taken to capitalism like pro's and run up huge debts.

These figures on the face of it look bad, but how bad are they really, if borrowing in the Ukraine was say £1m a year and now it's £1.8 that would be a 80% rise but not a huge increase or are the borrowing figures into the stratosphere?

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it's very significant

i dont know about ukraine

but in russia wage inflation is 30%,mortgage rates are 12%

search vtb24 on google, go to the english page

they're proud to offer mortgages for 50 years!

some with no deposits!

MEW ? no problem!

russia is a bigger car market than germany now

hence commodity price keep rising, boe cant rush to cut rates, developed world goes into biggest recession since early 1980s as global growth transfers from west to east

remember we had a bubble when asia blew up.. they're benefiting now as the west blows up

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