Beware of This Whole New Brand of Inflation

The version that's overtaking developing countries is threatening to spread to the rest of the global economy, and it's something the developed world isn't used to dealing with.

Inflation. It's different this time.

It's still got the same old causes:

How to fight inflation

What's different, though, is inflation's source -- the overheated economies of the developing world -- and the speed of its advance. This inflation isn't creeping higher; it's galloping.

Here's the big picture:

Inflation is tame in the world's developed economies at the moment, largely because growth in these still-damaged economies has been so slow.Msn.Video.createWidget('PlayerAd1Container', 'PlayerAd', 304, 314, {"configCsid": "MSNmoney", "configName": "player-money-4x3-articles-inline", "player.vcq": "videoByUuids.aspx?uuids=fc64ecc0-8128-49c3-b09c-e110e3e33eed,0d73d8fe-54fc-41bc-b9a3-d95f4a2b6448,3612d881-e6a6-4c59-9b2a-8db7c9a89fe4,d32830a7-bcb1-4518-a7d9-a8ab97e9fa18,6bfb776e-4efa-4aa8-8f7b-63db12162532,2946878d-29d8-4ab3-931c-5efd3687acde", "player.fr": "iv2_en-us_money_article_Investing-JubaksJournal-inline"}, 'PlayerAd1');Msn.Video.createWidget('Gallery4Container', 'Gallery', 304, 150, {"configCsid": "MSNmoney", "configName": "gallery-money-articles", "gallery.linkbackLocation": "bottom_left", "gallery.numColsGrid": "3", "gallery.categoryRequests": "videoByUuids.aspx?uuids=fc64ecc0-8128-49c3-b09c-e110e3e33eed,0d73d8fe-54fc-41bc-b9a3-d95f4a2b6448,3612d881-e6a6-4c59-9b2a-8db7c9a89fe4,d32830a7-bcb1-4518-a7d9-a8ab97e9fa18,6bfb776e-4efa-4aa8-8f7b-63db12162532,2946878d-29d8-4ab3-931c-5efd3687acde;videoByTag.aspx%3Ftag%3Dmoney_dispatch%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1;videoByTag.aspx%3Ftag%3Dbest%2520of%2520money%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1"}, 'Gallery4');But inflation may already be running out of control in the world's developing economies. That's largely because they weren't quite as damaged in the global financial crisis and have bounced back to rates of growth that were higher than those in the developed economies of Europe, Japan and the United States even before the crisis hit.

In the U.S., for example, inflation at the consumer level (measured by the Consumer Price Index) ran at an annual 2.1% rate in February. At the producer level, inflation ran at an annual 4.4% rate. Though a high rate of inflation in the Producer Price Index is often a sign of consumer inflation to come -- as higher wholesale prices lead to higher consumer prices -- the producer index actually fell in February.

See how the dollar is faring today

In China, on the other hand, inflation at the consumer level ran at a 2.7% annual rate in February. That would be nothing to worry about except that the rate is up strongly over January and December. China's producer prices climbed at a 5.4% annual rate in February. That was a big jump from the 4.3% annual rate in January -- which was, in turn, a huge jump from the 1.7% annual rate in December.

India, Brazil, Vietnam and other developing countries are showing similar increases in their inflation rates. (For more on this, see my blog posts "Inflation is breaking loose in China and India" and "Will April bring higher interest rates in Brazil?")A new kind of export Inflation is kicking up so strongly in the world's developing economies for five reasons:

Because their economies weren't as hard hit by the global financial crisis, they've bounced back hard with the help of government stimuli. China's stimulus, if you combine money from the government with an avalanche of bank loans, dwarfs that in the United States.

The governments of these countries don't think they have much choice but to pursue pedal-to-the-metal growth policies to stay even with the demand of young and fast-growing populations for jobs.

These countries were experiencing strong inflationary pressures in key sectors -- food in India and China, raw materials in just about every economy but Brazil -- before the global financial crisis and the global economic slowdown. Today's rise in inflation is back to business as usual in these sectors. In many instances -- raw materials such as iron ore or copper, for example -- increasing global supply requires investing in new capacity that can take three to seven years to get into production.

Most of these economies are built around export models, so higher growth means big surpluses of foreign exchange added to the money supply. Fast economic growth also makes these countries magnets for international capital, which again adds to the domestic money supply.

Many of these economies are riddled with classic supply bottlenecks. China, for example, has ambitious plans to expand its rail network but doesn't have the domestic capacity to produce all the rolling stock it needs. Imports could supply some of the demand while China's rail equipment makers geared up production, but the country's export model works to discourage imports. So China's rail and construction companies are left scrambling for the equipment and goods they need, driving up prices in the process. India's persistent food inflation, to take another example, is made worse by an antiquated system of storage and transport that lets between 25% and 40% of some crops spoil before they reach market.

In recent history, the U.S. experience with inflation has been with either the slow, dragged-out, resistant-to-easy-cures inflation of the 1960s through the double-digit rates of the early 1980s, or the inflation threat of a few quarters that's been quickly snuffed out.

We're looking at something quite different now in the inflation developing economies are exporting to the global economy.

Growth in inflation in developing economies starts from a higher level because these economies emphasize growth over price stability (and who says they're wrong to do so?). The European Central Bank wants to keep inflation under 2%. The target of Brazil's central bank is 4.5%.

But, more importantly, we're looking at a shift from a global economy where China and other developing economies were exporting deflation in the form of a larger and larger supply of cheaper and cheaper goods to one where prices are rising on the shelves at Wal-Mart (WMT, news, msgs).

And once the cycle moves from rising inflation to a fight against inflation, the effect will be much more dramatic than the usual slowdown in the global economy that results from, say, the United States slowing growth to fight inflation. Because the developing economies of the world have become the world's factories, they've become the marginal buyers in raw material after raw material. It's Chinese, Indian, Indonesian and Vietnamese demand that sets the price for copper and iron and nickel and, well, you name it. The rally in commodity prices that has helped pull global stock markets out of the dump has been built on a foundation of increasing demand from the developing world.

The financial markets are clearly afraid of what a drop in that demand would mean for commodity prices -- and the financial market is right to be afraid. Policies designed to fight inflation that slow the economies of China, Brazil, India and the rest of the developing world will send commodity prices tumbling. That will, if stock market action so far in 2010 is any guide, be enough to stall, at least, the rally that began in March 2009.

Continued: A subtler sort of inflationMore from MSN Money and MoneyShow.com

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Honest investment advice . . . from Bernie Madoff?

For now, the money's made in USA

Jubak on video: Why China is crucial to the global economy

Is China actually bankrupt?

Jubak on video: Greek debt crisis will rise again

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It would be nice if the United States Government would quit lying about the real amount of  inflation we have in this country.

 

                                           Lynn X

ReplyReport AbuseJonny1203 #2Thursday, March 25, 2010 8:49:44 PMI don't care how they measure inflation. People can debate the definition of inflation all day long. All I know is that my salary doesn't buy what it did even a few years ago. Especially the necessities. And I suspect it can only get worse when payment for the government's spending spree comes due. I imagine the tax deduction columns on my paycheck will be bigger and the company will hold back some of my pay one way or another so they can pay Uncle Sam too. ReplyReport Abuseanonymous888 #3Thursday, March 25, 2010 9:11:26 PM

You are right Jim, inflation here in Singapore is rampant it is showing up in clothing, electronics, food, energy prices, etc.

 

Salary in Singapore has increased by 30% in 2009 and is expected to increase anywhere from 40-50% this year... This is thanks to the Singapore government that has decided to curb the in-coming foreigners to take up jobs in Singapore.  The arguement from this has been that the population in Singapore is currently made up of 30% foreigners... I have had to beg to keep my secretary , the current labour market here is the bosses are struggling to keep the worker as salary and wages spiral out of control while the Singapore government refuses to let us import in qualified workers from the US.  Unfortunately most of us have to stay here because biz is so good , companies here are making tonnes of money, so we have to give in to worker demands.  Especially spoiled pampered Singaporean workers...

ReplyReport Abusejarlsbane #4Thursday, March 25, 2010 9:28:34 PMHopefully, the developing world will deal with inflation by allowing their currencies to gain value relative to the developed world currencies. This will reduce the current account imbalances with the developed world, and thus create opportunities in the developed world.Unfortunately, the developed world will import  inflation from the developing world, but this is an unavoidable correction in market power, from the developed world to the developing world, that will happen one way or the other. Bernanke & co. understands this very well and will keep interest rates very low as long as core inflation is virtually non-existent. If U.S. bond-rates go too high, B. & co. may start Quantitative Easing again.Low interest rates are needed to finance investments that either locate more raw material, utilize raw material more efficiently, or substitute for different raw material (for instance, natural gas instead of oil).With the rise of the developed world (economically), this shift in market power is unavoidable, the only issue is how we deal with it. Trying snuff it out by jacking up interest rates (while core inflation is low) will just make it harder.ReplyReport Abusegray-beard #5Thursday, March 25, 2010 10:04:45 PMThe "inflation question" has been bothering me for some time.  On the one hand, it seems that inflation would be inevitable given higher worldwide demand for resources --whether it be food, oil, metals, or electronics.  The increased money supply in the wake of last year's crisis ought to fuel inflation, too.  What, then, explains Japan's economy after their real estate bubble? They have experienced slow deflation for 20 years. In some ways, it seems the US is following in Japan's steps.   Like Japan, our population is aging, our social security needs are growing, our sovereign debt is ballooning, and our people enjoy high wages relative to others in the world.  And we have especially high unemployment -- always a damper on wages.  We also have frugality back in style, leading to less consumption.  Add to that a baby bust and a huge drop in immigration, and I do not see demand for anything in the US growing.  Inflation?  Maybe.  We are not an isolated economy. Maybe Jim's right.  We won't see it until we are cooked.ReplyReport Abusefreelancer73 #6Friday, March 26, 2010 6:52:30 AM

Dear Jim Jubak!

 

Your conclusion about future slowing of the developing economies, it's a pity to be agreed, is a firm one and this scenario is inevitable. It could be possible to estimate it through the effect somewhat resembling crowding-out effect affecting the national demand in such developing economies in the demand side. From the other hand, it is improbable that the developed economies continue to import goods and commodities within the prolonged deficits in the existing frame of the international trade and finance when some rating agencies are hinting on downgrading even the USA and UK sovereign rates. The issue now is not to overlook the commence of the turnaround for the interest of the equity holders.

 

Sincerely

ReplyReport AbuseKOJAK41 #7Friday, March 26, 2010 7:14:33 AM

I has a PhD in Economics and for years taught and participated in the determination of various inflation indexes.  Under the current conditions the indexes understate the rate of deflation or overstate the rate of inflation since the price samplers are specifically not allowed to shop sales, specials, etc. since the index is not intended to reflect the shopping skill of the field personnel, but currently stores, restaurants, internet outlets are running continuous sales and other discounting activities.so by measuring list prices the indexes overstate the actual cost levels.

 

Housing is another area where the rapid lowering of house prices is not felt but the majority of people who continue to live in there houses and pay their existing mortgages, but a house on my street that sold for $1.2M in 2007 just sold for $80K last week.  Most of us have not seen a drop in our individual housing monthly costs, but for those buying into the current market the cost is much lower now.

 

Much of the money loaned to he banks is not causing inflation at the present point in time since the banks are setting on the money rather than pumping the money into the economy.  Banks don't loan money just because they have it, but loan it only when they see an opportunity to place a loan at a profit with a high probability for being paid back over time.  If times improve, the excess money must be removed from the banking system to prevent excessive inflation, but that time is not now. 

 

 I have considered my personal bank well run , but in the last two quarters they have lost $1.7B on foreclosed housing and commercial property.  They stand to lose another $3B on non-performing loans in the next year.  They are in the best shape of all the banks in this state that are not branches of national (too-big-to-fail) banks.  I have reluctantly moved my personal accounts to Chase and Wells Fargo.  The FDIC started this crisis with $40B to insure banks with total deposits of $7T.  They have only $3B left so they will be asking for many billions more to cover bank failures.

 

 

ReplyReport AbuseA Leg Up #8Friday, March 26, 2010 7:26:07 AMWhat terrible, wonderful news this inflation word is!  It brings great tears to my eyes to think that those greezy banks might have to raise their C.D. rates, it's about f***ing time that a man could get a respectable interest rate on his hard earned sweat money! It is then and only then that you can use the rule of 72 without some neck tie wearing **** to steal your money away!  ReplyReport Abusemorr #9Friday, March 26, 2010 7:38:40 AMThe problem I see with this argument is that he doesn't take into account exchange rates.  Typically as a country experiences inflation their currency devalues to other currencies of nations not experiencing the same deflation.  So if this happened the dollar would be going up in value comparatively (which has been happening recently), which would keep the price of imports from these inflated nations down in the importing nation.ReplyReport Abusesdpa #10Friday, March 26, 2010 7:50:38 AMKOJAK41-a house down the street that sold for 1.2M in 2007 just sold for 80K last week.------------I have been looking for a deal like that for a while now, if possible, can you provide location or specifics.  I will pay cash.  I am not an investor but sold my house 10/09 & looking to re-invest into a place to retire in about 4 years.  ThanxReplyReport Abuse1 - 10 of 20PreviousNext_ucf13('0'); _iuc2Om1('MSNPortalInlineComments','Initial_Load_Comment_View','http://articles.moneycentral.msn.com/Investing/JubaksJournal/a-whole-new-brand-of-inflation.aspx?','en-us');Are you sure you want to delete this comment?Report AbusePlease help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease notify us using the Report abuse form below. We will investigate your report and take appropriate action against offenders. We report all illegal activity to authorities.CategoriesSpam or advertisingChild pornography or exploitationProfanity, vulgarity or obscenityCopyright infringementHarassment or threatOtherAdditional comments(optional)100 character limit To add a comment, pleasesign in/*MSN PrivacyLegalAdvertiseRSSHelpFeedbackSite mapAbout our ads© 2010 Microsoft/* Read Full Article »