European inflation unexpectedly accelerated to the fastest in almost three years in September, complicating the European Central Bank’s task as it fights the region’s worsening sovereign-debt crisis.
The euro-area inflation rate jumped to 3 percent this month from 2.5 percent in August, the European Union’s statistics office in Luxembourg said today in an initial estimate. That’s the biggest annual increase in consumer prices since October 2008. Economists had projected inflation to hold at 2.5 percent, according to the median of 38 estimates in a Bloomberg survey.Faster inflation increases pressure on an economy already hurt by tougher austerity measures and waning investor confidence as governments combat the fiscal crisis. European economic confidence slumped more than economists forecast in September, partly as households grew more pessimistic. Commerzbank AG said today that the region “looks set to slip into a recession.”“It’s more of a technical thing than a fundamental change,” said Laurent Bilke, global head of inflation strategy at Nomura International Plc in London, which was the only bank to forecast the right inflation rate in the Bloomberg survey. “The ECB is not going to cut in October and obviously strong inflation doesn’t give them much room for maneuver on that side. They will probably need a few more months of negative economic news to get there, maybe in November or December.”.....ECB President Jean-Claude Trichet, who will retire at the end of October, said on Sept. 8 that inflation rates are “likely to stay clearly above” 2 percent in the coming months before falling below the central bank’s ceiling in 2012. This assessment is based on “moderate economic growth,” he said. Trichet will be succeeded by Italy’s Mario Draghi......“Next year, inflationary pressures are projected to abate,” ECB council member Erkki Liikanen said in a speech posted on the Bank of Finland’s website on Sept. 27. “Ultimately, it’s the responsibility of monetary policy to ensure that this moderation will take place.”
Members of the central bank and other policy markers are hoping that the "cure for higher inflation is higher inflation." Put another way, higher prices decrease demand, thereby lowering price pressure. Supporting this is the strengthening dollar, which will lower the price of commodities, all of which are priced in dollars.
However, inflation is a becoming a bigger concern of mine, largely because of agricultural price pressures across the globe. We've seen truly bizzare weather over the last year play havoc with crops. India and China are adding extremely strong pressure to the demand side of the equation, pulling the demand curve to the right. And there is only so much yield to expect from crops. In short, I'm not seeing enough relief in this area of warrant a calmer inflation outlook just yet.
1 comment:
Yep. It's something we should really be keeping an eye on.
Yields of a number of things are terrible this year -- the corn picture would look vastly worse if we hadn't had high prices prompting a record number of acres in production. We used more land and more resources to produce less corn per acre than we've seen in a long time. If you look at the USDA reports, a lot of the hits are also in quality, with lots of things coming in at frighteningly high rates of "very poor" or "poor." US sorghum is awful this year. And skipping out of food, cotton is also in trouble, FWIW.
And some of this will filter for a while. Rangelands are "poor" to "very poor" in most of the heavy cattle grazing lands, hay is having to be imported from out of state in drought-hit areas, and corn and other feed grains are pricy. Almost all but the best breeding livestock are being sent to finish early to cut costs, which means there will be a spike in the number of head going to slaughter over the next months, but each will be killed at lower weight than normal.
And next year, we'll be in for a world of hurt -- animals are being rushed now, and that will mean very few from the time those work through until the stocks are replenished. Beef in particular is probably headed for a wild ride over the next 12-18 months, and some of the same pressures will hit dairy, too.
You can't get more rain at any price. It is perfectly possible for inflation more generally to be very low, but for food prices to be skyrocketing. Demand isn't terribly flexible, supply is largely inflexible in the short term, and price is inflexible to the downside in livestock in particular, where other ag inputs (hay/corn/decent rangeland for cattle) are very tight.
Maybe, someday, the world's economists will realize that even in straight-up economic terms, the costs involved in climate change will likely be much higher than the costs of trying to prevent it from getting worse. But I'm betting we're headed for very troubled food production for quite a few years before that reality sets in.
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