Global inflation surging

China, India, Europe, UK and even US inflation is accelerating sharply at the moment. Data over the weekend reinforced that the period of ultra-low rates is probably ending and rates might move more sharply than markets expect even with growth not yet assured.
Over the weekend the PBoC increased the reserve requirements for their major banks for the 7th time since Q3 last year taking it to 20.5% after the annual pace of inflation rose more than expected to its highest level since July 2008 at a time when growth remains strong.

However it is not just China who is worried about inflation with the US experiencing an 0.5% increase in consumer prices  for the second straight month in March, data released Friday showed. These two increases come on the back of two consecutive increase of 0.4% in December and January. This has seen the annual pace of inflation rise to 2.7% from 1.5% over the past 4 month period and 1.1% in November last year. The really scary stat is this acceleration of inflation in the US. It may seem like voodoo stats but if we annualize the last 4 months we can see that the annual US inflation rate is rate is running at the same pace as that of China. Is it any wonder that a number of Fed members are getting anxious about rising inflation. 

But it gets worse with the actual annual pace of US inflation  expected to rise considerably over the coming months if the recent trend continues as we see a number of benign (really low or negative) outcomes from the first half of 2010 drop out of the calculation. Over the next three months we have an aggregate of -0.3% in monthly outcomes to drop out of the calculation (April 10: 0.0%, May 10: -0.1, June 10 -0.2) meaning that even if consumer prices were flat over the next three months the annual rate would hit 3% as QE2 comes to an end if it proceeds as planned. If the outcomes are in the vicinity of 0.4% to 0.5%, which we have seen over the past 4 months the annual rate will increase to between 4.2% and 4.5%.

Oh, and for Janet Yellen’s edification following what she had to say last week (which Deus Forex Machina discussed here) look at the relationship between the rate of growth in inflation and the Fed’s balance sheet. Nothing to see is here Janet.

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  1. A certain Doors song comes to mind.

    Gold in AUD breached $1400 an ounce again last week and is heading above $1500 in USD soon (spec).

    I don’t think a few 25 or even 50 bps tightening by CB around the world is going to put a dampener on inflation expectations.

    • Deus Forex Machina

      That’s the scary thing Prince don’t you reckon???…what if Central Bankers agree with you and pull too hard on the tightening trigger…we need the Fed to take a leadership role and drop its QE so the markets can settle and we can figure out whats “structural” inflation and what’s just market froth.

      • Settle? You reckon?

        I’m trying hard to see how any IR tightening and withdrawl of QE and reduction of targeted stimulus is going to result in anything other than outright massive net deflation.

        …but i honestly don’t think they will tighten much at all – deflation is politically and neo-classically much more undesirable than inflation, as a means of dealing with excesses (huge in this case!) of debt.

        No, IMHO, we’re still looking at govt/CB induced Stagflation in the medium-term, as deflation looks like a CB/govt failure, whereas inflation “at least looks like we’re trying to do something”, even if it is actually worse than taking the deflationary hit…

        my 2c

  2. I’ve been barking about this for some time. Deus forex prognostications on the A$ are particularly relevant.
    Again, our FOB prices out of China are rising faster than the A$. Our landed cost is now higher than when the A$/USD was 0.85
    So unless the A$ keeps rising at the rate it has for the last 18 months (or thereabouts) we are about to import substantial inflation. This applies even if the A$ holds at say 1.05. Lord help us if it falls.
    So, instead of imported goods being a negative to the CPI they will become a positive to add to domestic inflation now apparently running at about 5% and likely to get a lot worse as government charges run out of control.

    Sorry to be repetitive.
    It’s just that no one seems to grasp what is actually going on down here in the real world.
    The real question to me is what will Central Banks do about it including our own RBA. Will they ignore inflation as Bernanke and King are now doing. I don’t think thjere is much risk of them pulling too hard on the trigger! Your REAL after-tax interest rates are bound to remain negative. Still, will the RBA’s interest rate be say 7 or 8% in 18 months time? Note, with inflation running at say 7%, this is likely to be a REAL AFTER-TAX negative rate of around MINUS 5% (Double negative I know…just emphasis)
    In addition, if interest rates across the globe are rising, can Aus just ignore it with our massive foreign Debt?
    I have my own opinions, which are often wrong, but I’m more interested in the opinions of others perhaps more knowledgeable than I.

  3. An update.

    My GM has just come back from China. We employ two people who train factory workers and supervise production of part of our range. So we have just discussed their wages.
    Our problem arose because the factory workers, they are supervising, who were being paid RMB2500 per month 12 months ago are now paid RMB3500. A 40% increase in wages in 12 months. Even then the factory is having trouble keeping its workers and wages are expected to rise quite a bit further in the near future.
    I have detailed before similar reports from other factories. This is widespread.