Friday, June 20, 2008

What Inflation?

From Bloomberg:

India's inflation accelerated to a 13-year high and economists forecast higher consumer prices in China after record crude oil forced both nations to increase the regulated cost of fuel.

India's wholesale prices jumped 11.05 percent in the week to June 7, the government said today, more than the median 9.79 percent increase in a Bloomberg News survey of 18 economists. China's fuel price increase today may lift consumer prices by as much as 1 percentage point this year, a separate survey showed.

A near doubling of crude oil prices has pushed up subsidy costs and threatened to erode profits of refiners such as Indian Oil Corp., prompting governments from Indonesia to Sri Lanka to raise fuel prices. That's adding pressure on central banks to increase interest rates and cool inflation, risking growth.

``If China and India are going to continue to roll back subsidies, then clearly we have not seen a peak in inflation,'' said Joseph Tan, a strategist at Fortis Bank SA in Singapore. ``They need to tighten monetary policy, which means that growth is going to slow.''

Considering the spike in commodity prices, this news should not be surprising. There are several things to note from this article.

1.) Spiking commodity prices are hitting everyone -- not just the US

2.) There has been a fair amount of discussion about "de-linking", meaning the US slowdown will not effect the rest of the world. This news should indicate that idea is a fantasy. One of the US primary problems right now high commodity prices which are a prime cause for India's and China's problem.

3.) As long as commodity prices remain high, expect more and more upward pressure on worldwide interest rates

Also consider this news, also from Bloomberg:

German producer-price inflation, an early indicator of price pressures in the economy, accelerated to the fastest pace in almost two years in May on energy costs.

Prices for goods from newsprint to plastics increased 6 percent from a year earlier, the most since July 2006, the Federal Statistics Office in Wiesbaden said today. Economists expected a 5.8 percent gain, the median of 27 estimates in a Bloomberg News survey shows. Prices rose 1 percent from April.

Inflation has been pushed up by record energy and food prices, crimping consumers' spending power and clouding the outlook for economic growth across the 15-nation euro region. European Central Bank President Jean-Claude Trichet said on June 5 that the bank may increase its benchmark rate next month to rein in inflation expectations.

``The pressure in the inflation pipeline is still very high and will rise in coming months,'' said Andreas Rees, chief economist Germany at UniCredit Markets & Investment Banking in Munich. ``The ECB will point to inflation dangers to justify an interest-rate hike in July.''

Energy prices rose 15 percent from a year earlier and oil products were 25.9 percent more expensive, the statistics office said. Excluding energy, producer prices rose 2.9 percent.

Trichet has consistently stated that price stability is his primary concern. In addition, EU rates are still higher than US levels -- adding to the euro's overall strength right now.