Asia, Europe data point to mounting inflation risks

China and India reported higher-than-expected inflation readings on Friday, giving fresh ammunition to central bankers and investors alike who are worried about mounting price pressures in the global economy. Consumer prices in the eurozone also picked up more than expected, while figures due later in the day from the United States are expected to show a similar trend, with the inflation rate still moderate but steadily rising, not least because of higher food and energy costs.
Prices of oil and grain, in turn, are climbing in part because of strong growth in China, India and other emerging economies, which have shown the developed world a clean pair of heels since the global financial crisis. "The weakness in markets this week is expected after the smart comeback we have seen recently, with inflationary concerns again coming to the forefront," said Jan Lambregts, global head of financial markets research at Rabobank.
Consumer price inflation in China quickened to 5.4 percent in the year to March, the fastest rate since July 2008, from 4.9 percent in the first two months of the year. In India, the Wholesale Price Index, the main inflation gauge, rose 8.98 percent in the year to March, up from 8.31 percent in the 12 months to February and beating market projections of an 8.36 percent reading.
Economists expect the central banks of both countries to tighten monetary policy further in short order to dampen inflationary pressure. A rise in the proportion of deposits that Chinese banks must hold in reserve, rather than lend out, could be imminent after Premier Wen Jiabao in midweek reaffirmed his determination to keep a lid on prices. Core inflation, excluding food and energy, was the highest in China in a decade. In India, too, a sharp upward revision to figures for January has led some economists to the conclusion that underlying price pressures are greater than they had thought.
"It seems that inflation trajectory has changed. The expected decline in inflation is just not happening and looks like we have underestimated the underlying pressure on prices," said Ashutosh Datar, an economist at IIFL in Mumbai. "More monetary tightening is inevitable after today's data and the case for a 50 basis point hike in May is strengthened," he added. Final March figures for the euro zone showed inflation jumped to 2.7 percent from 2.4 percent in February, slightly more than a preliminary forecast and the fourth month it has been above the European Central Bank's target of 2 percent.
The ECB was the first of the three major Western central banks to raise rates last week and it is expected to move again by July despite concern over the damage higher rates will do to economies like Portugal and Ireland struggling with high debt. "The big news in these numbers is that core inflation rose noticeably," said ABN Amro analyst Nick Kounis. "Although we expect a rate increase at the July meeting, the balance of risks is tilted towards an earlier move."
The People's Bank of China, the central bank, has increased benchmark interest rates four times since last October and has required the country's big lenders to freeze a record 20 percent of their deposits. Dong Tao, the chief China economist for Credit Suisse, expects tightening to resume in the second half of the year nad the rate banks offer on one-year deposits to rise another 1.5 percentage points by the end of the year. "In our view, China is by no means near the end of the current tightening cycle. Food inflation is transitory, but service inflation and wage inflation are structural," he said. That bodes ill for Western economies that are big buyers of manufactured goods assembled in China. If imported inflation keeps climbing, central bankers will have to press down domestically generated prices if they want to hit their overall inflation targets.