'Bring us Sugar!' US Inflation and the Rest of the World
Yesterday I set up a Google alert for "inflation," expecting to turn up the occasional article on monetary policy and such. Instead I got deluged with stories from around the world about how rising prices are causing everything from "political pressure" to food riots.
Massive selling hit the Indonesia Stock Exchange on Friday as investors balked at Bank Indonesia's projections. Jakarta. Investors and analysts alike have offered a sour reaction to Bank Indonesia's confidence that core inflation will not surpass 5 percent and rising food prices can be controlled.
"We're confident core inflation will not surpass 5 percent," said Perry Warjiyo, director of monetary policy and research at the central bank, referring to the level that would trigger policy tightening. "Rupiah appreciation can still curb inflation expectations."
Annual inflation in Estonia reached 5.7 percent in December, the nation's statistics agency said Friday, confirming fears that consumer prices are spiraling higher in the eurozone's newest member.
Statistics Estonia said that goods prices jumped 7.2 percent in December 2010 compared with the same period a year earlier, with food and nonalcoholic beverages soaring 12.1 percent. In November annual inflation had been 5.3 percent.
Brazil's consumer prices ripped past the government's target last year, confirming that one of new President Dilma Rousseff's most urgent battles is fighting inflation. Consumer inflation, as measured by Brazil's official IPCA, reached 5.91% in 2010, the country's statistics agency IBGE said Friday. The pressure came mainly from food, whose prices soared 10.39% last year.
The 2010 figure was slightly above the 5.90% average forecast of 100 analysts and economists in the Brazilian Central Bank's weekly survey Jan. 3, and notably higher than the 4.31% pace in 2009. It was the highest since 2004, when inflation hit 7.6%.
Brazil's government has stuck zealously to 4.5% inflation target for 2010. The Central Bank's new head, Alexandre Tombini, said Thursday the government plans to continue to pursue an annual 4.5% target for 2011, while analysts already expect 5.32%.
Consumer prices are rising at a quick pace in the some of the largest economies in Latin America, complicating the task of governments that want to maintain high growth rates without sparking inflation.
On Friday, Brazil announced that consumer prices in 2010 had increased faster than the government's targeted levels, mainly driven by higher food costs. The news is likely to weigh on the new administration of President Dilma Rousseff, who has vowed to maintain policies that have led to the country's economic boom of the past decade in which millions of Brazilians improved their living standards.
But as she took office Jan 1, Ms Rousseff declared high inflation was a "plague" that damaged poor families, and vowed to fight it. Brazil and other Latin American economies have been able to grow with relatively low inflation rates, but higher food and energy costs around the world bring a new challenge to policy makers.
In Mexico, the region's second largest economy, consumer prices data also leased Friday showed a higher than expected rise in December, pushing inflation for the full year to 4.4%, up from 2009 when the economy suffered a deep recession.
The Bank of Mexico said that the consumer price index rose 0.50% last month, as higher prices of cigarettes, tortillas, and limes outweighed declines in others items. Still, the Bank of Mexico said that after spiking higher in the first quarter of 2010, inflation eased on favorable produce prices and a smaller-than expected impact from last year's increase in consumer taxes.
Peru, another fast growing economy, is also taking measures to fight inflation. The country's Central Bank on Thursday decided to take a preventive step, increasing its reference interest rate citing dynamic domestic demand, "in a scenario of increases in the international prices for food and energy."
We were only partially serious when we predicted that following the just released FAO data confirming food prices have just hit an all time high, we were expecting food riots to ensue imminently. Alas, as all too often happens these days, we were right. 2011 first and certainly not last rioting comes out of Algeria, where Bernanke's genocidal policies are first to take root. From the Associated Press: "Riots over rising food prices and chronic unemployment spiraled out from Algeria's capital on Thursday, with youths torching government buildings and shouting "Bring us Sugar!" Police helicopters circled over Algiers, and stores closed early. Security officers blocked off streets in the tense working-class neighborhood of Bab el-Oued, near the capital's ancient Casbah, and areas outside the city were swept up in the rampages. The U.S. Embassy issued a warning to Americans in Algeria to "remain vigilant" and avoid crowds. Riots on Wednesday night in the neighborhood saw a police station, a Renault car dealership and other buildings set ablaze. Police with tear gas fired back at stone-throwing youths through the night." Algeria's violence is unfortunately just the start. The big to keep an eye out on is rice. If the liquidity makes its way there, the Chinese soft landing may just become much, much harder.
U.K. economists predict the Bank of England will keep its bond program and key interest rate on hold next week after above-target inflation prompted some analysts to bring forward forecasts for increases in borrowing costs.
One look at the M2 chart below shows that the reliquification of the market by the Fed is proceeding according to plan: having increased for 23 of the past 25 weeks, the M2 has hit another all time high in the final week of 2010 at $8,848 billion, a $14 billion weekly increase, and a $316 billion annual increase (we will present the M2 constituents change next week).
Things that seem pretty minor to Americans -- like $3 gas and an extra quarter for a box of Cracklin' Oat Bran -- are major problems for countries where food and fuel are dominant daily expenses.
Based on these reports, today's inflation is mostly limited to food and energy, with food price spikes being due more to crazy weather than to surging demand. So it's not yet a systemic, generalized, global inflation, and bumper crops in the coming year would ease some of the pressure.
Still, the US is clearly exporting inflation. Because we import much of what we consume, newly created-dollars flow overseas where they pump up prices.
Could it be that the real limit on the Fed's ability to inflate will be not the dollar's exchange rate or US interest rates, but the willingness of the rest of the world to absorb all this hot money?