EM inflation: just a bit of bad weather? | beyondbrics | News and ...

Long before unrest in the Middle East, the Japanese earthquake, and $120 oil, there was another catalyst that derailed the runaway rises in emerging market equities: inflation. Indonesia and China were the focus at that time, though India and its costly onions were also a big concern.

Now, a few months (and a few rate rises) on, and food inflation appears to have peaked, for now at least. So was it all just a spot of bad weather?

Perhaps. Unseasonal rains in Indonesia were a major factor in spiking chilli prices, drought ? and a fear that it wouldn?t end ? contributed to higher inflation expectations in China, while onion prices in India may have been boosted significantly by hoarding. Flooding in Australia will too have played a part.

A note from Jonathan Anderson at UBS highlights the most recent moves in the average food price index, and points out that while food prices may not be falling, they are no longer soaring higher:

Even if prices don?t move down, a plateau itself is good news, he says. Why?

If we measure from the year 2000, over the ensuing decade non-food ?core? goods and services prices in the CPI basket grew at an average annual pace of 5.4% in the EM world as a whole. For food prices, including both of the major shocks of the past few years, the corresponding rate was 6.9%. And average per-capita GDP, in local currency terms? Around 11%.

In other words, while food costs have clearly grown somewhat faster than the rest of the consumption basket, average incomes have grown far faster still. And it would take a good bit more than the most recent food CPI increases to reverse that trend.

In some ways, it shouldn?t come as a surprise ? some economists (including Anderson) predicted that inflation would peter out in the middle of the year (though others disagree ? read Fred Neumann of HSBC here), providing the impetus for a decent second half performance for EM assets.

But there are naturally a couple of caveats. Firstly, oil shocks do result in food shocks, as the price of turning hydrocarbon into carbohydrates goes up. Secondly, there are some EM countries where core inflation, and not food, remains the bigger problem anyway.

Related reading (and watching):
Inflation hits emerging markets, FT Video
How oil affects the price of peas in China, David Pilling in the FT
Inflation: embedding or decamping?, beyondbrics
Inflation file, beyondbrics

Source: http://blogs.ft.com/beyond-brics/2011/05/18/inflation-in-em-just-a-spot-of-bad-weather/

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