China in grip of inflation

Prime Minister Wen Jiabao and his entourage set off into Beijing's back streets one morning this month [Nov 2007], in search of "genial informal discussion" with "people facing hard times," as the state press put it. His visit was intended to broadcast the government's commitment to defusing the leading complaint on the Chinese street this fall: inflation. The highest inflation in more than a decade is frustrating citizens and unnerving political leaders who are mindful that rising prices have been a volatile factor throughout Chinese history. The premier's much-photographed walkabout highlights a central dynamic in China's political balance: The public permits the Communist Party to rule without opposition as long as the regime continues to improve the standard of living. Indeed, facing 11 local residents, Wen said that ensuring a thriving country and prosperous population is "the party and government's duty."

China's consumer prices soared by 6.5% in October, compared with a year earlier, matching a rise in August that was the highest in 11 years. Housing is also on the rise, with home prices growing by a new monthly record of 9.5% in October despite government efforts to slow the boom. Driving the increase in day-to-day goods was a 17.6% leap in food prices, which draw particular ire in China because people spend a relatively high portion of household income on food. The issue was grimly illustrated earlier this month when three shoppers at a supermarket in the inland city of Chongqing were killed in a stampede of customers fighting over bottles of specially priced cooking oil. The discount of 20% amounted to $1.50 a bottle.

Economists and executives in China say the increases reflect soaring prices worldwide for oil, grain and other commodities. Those price spikes are rippling through the production chain with no obvious end in sight. Economists suspect that prices are likely to climb still higher before the end of the year. The September price controls prevented refiners from passing on higher crude oil prices to consumers. Refiners simply cut their production of gasoline and diesel, leading to long lines at the pump and a new round of complaints. Chinese authorities had no choice but to relent. They permitted an increase of about 10% in the price of gasoline and diesel. And that, manufacturers say, is likely to push up the price of other goods - extending the cycle of rising prices.

(2007-12-02 22:30:19 SGT) [Biz] Permalink

European money supply growth accelerated unexpectedly in October

bloomberg.com :

Money-supply growth in the euro region accelerated more than economists forecast in October, to the fastest pace in more than 28 years, adding to the European Central Bank's inflation concerns. M3 money supply, which the ECB uses as a gauge of future inflation, grew 12.3% from a year earlier, after gaining 11.3% in September, the Frankfurt-based bank said today [28 Nov 2007]. That's the highest rate since July 1979. M3 is the broadest gauge of money supply and includes cash in circulation, some forms of savings and money-market holdings. The M3 growth rate has exceeded 4.5%, the level the ECB still deems non-inflationary, every month since May 2001. [1]

The ECB said Nov. 23 it will continue to make additional cash available to banks to "counter the re-emerging risk of volatility" in money markets. ECB council member John Hurley said yesterday that the disruption in credit markets "is still very much ongoing and is likely to persist, at least into the early part of 2008." [2]

"The current conjuncture seems to point to an uncomfortable, though temporary, combination of higher inflation and somewhat slower economic growth in the coming months," ECB Vice President Lucas Papademos said this week. [3]

[1] Interesting that a. ECB looks at M3 and b. deems 4.5% M3 non-inflationary.
[2] "Making additional cash available" sounds, well, inflationary.
[3] Higher inflation + slowing/stagnant economic growth = stagflation.

(2007-12-02 22:20:21 SGT) [Biz] Permalink

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