Tuesday, June 3, 2008

Inflation headlines are finally showing up

Inflation is one of the things that I've been watching closely. Buffett always worries about inflation. Now, the headlines are finally flashing everywhere. Looks like media, big boys, politicians, central bankers, etc begin to talk about it extensively compared to two months ago. Some people think this is more of a transitional period for developing economies, it's cyclical in nature. They opined inflation should peak soon as developed countries knocked into a slow down or recession. Did Asian Central banks got their bet right? Bloomberg writes: China Leads Asia in Retreat From Inflation Battle.

June 2 (Bloomberg) -- Plummeting currencies did in the first Asian economic miracle. The second may fall victim to surging inflation.

Central banks from Beijing to Bangkok are losing their bets that a global slowdown would temper price increases. While export demand from the U.S. and Europe may have eased, it has been replaced by rising domestic consumption that has helped push inflation rates in Asia as high as 26 percent.

The result: In China, Thailand, the Philippines and at least eight other Asian economies, benchmark borrowing costs are lower than the rate of inflation, resulting in negative real interest rates, according to data compiled by Bloomberg. The risk is that prices will spiral even faster, leading to overheated economies and an eventual bust.

``Unless there are concrete measures to tackle inflation, investors are going to reconsider the Asian growth story and realize it's not as rosy as it seems,'' says Sailesh Jha, an economist with Barclays Plc in Singapore. ``Confidence will weaken, and there'll be a significant correction in asset prices such as stocks as capital flows out.''

Thailand's central bank has held its main rate at 3.25 percent for almost a year, while inflation has tripled to 6.2 percent. The People's Bank of China, which announced in early December a planned shift to a ``tight'' monetary policy, has kept its main lending rate unchanged at 7.47 percent since the end of 2007, even as inflation soared to 8.5 percent, near a 12- year high.

Asian Central bankers had better take quick action to catch up loss time. I've been worry about this when I made two entries earlier(Forget about subprime, in Asia the big fear is inflation and oil speculation) With enough pressure builds up, some will take some money off the table--reducing their bets exposure. As soon as this "first wave" fear subsides after a big sell-off, it will attract more hot money to bet on interest increase or currency appreciation. The "second wave" will continue to drive up asset prices again. If left unchecked, this self-reinforcing loop is dangerous. It will create assets bubbles, when it burst, it will be very ugly. There will be people get hurt.

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