The emerging market inflation problem isn’t going away, and it’s time you got up to speed on where the problem lies, especially if you’re among the throng shoveling money their way.
We all know how we got here: The growth in emerging markets has created a whole new level of demand from countries like India and China, weather has hit commodity prices this year, and the U.S. is flooding the market with easy money through QEII.
But now the impact is being felt in stock markets around the world. The Shanghai Compsite is down 4.7% since November 1. The BSE is down 1.7% in the same time period, but was down 2.44% last night on tightening concerns. The Jakarta Composite was down 2.81% last night too.
But just what does this situation look like? In China, where tightening measures are coming in heavy, and SHIBOR, the lending rate, is spiking, inflation concerns remain high. And while inflation dipped last month, Nomura doesn’t see that as a sign that things are turning down for the economy.
Instead, their call on Chinese inflation remains high, driven by a couple of factors:
- La Niña impacting agricultural commodities
- “Burgeoning demand” from China (and India, among other countries)
- The link between oil prices and food prices
- China is moving from an export economy to a consumer driven economy way quicker than the world thinks
Note, CPI has dipped, but it still remains above the 50% level which indicates rising prices.
India is the other big worry. What’s happening there? Well, roughly the same thing that is happening in China: rising food and commodity prices, surging demand, etc.
But the big concern has to be that people now expect prices to rise for food. That means, even while India’s central bank is raising rates to handle the core inflation problem, consumers are more focused on rising food prices. So they start adjusting, and paying more. So prices go up anyway.
Beyond China and India, there are some other big worries. Vietnam stands atop the inflation table, prices being driven higher by a weakening of the dong. They’re also dealing with all the problems India and China are, like higher demand for commodities and weakening supply due to weather.