Reuters/Beijing
China and India reported higher-than-expected inflation readings yesterday, 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.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% in the year to March, the fastest rate since July 2008, from 4.9% in the first two months of the year.In India, the Wholesale Price Index, the main inflation gauge, rose 8.98% in the year to March, up from 8.31% in the 12 months to February and beating market projections of an 8.36% 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. Final March figures for the eurozone showed inflation jumped to 2.7% from 2.4% in February, slightly more than a preliminary forecast and the fourth month it has been above the European Central Bank’s target of 2%.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% of their deposits. Dong Tao, the chief China economist for Credit Suisse, expects tightening to resume in the second half of the year and 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.Separately, US data showed yesterdays rising food and gasoline costs lifted US consumer prices overall in March, but underlying inflation pressures were contained and consumer confidence rose in April. While consumers remained concerned about higher fuel and food prices, they saw the sharp rise in gasoline prices as temporary and longer-term inflation expectations eased. The small rise in core inflation, excluding food and energy costs, and the moderation in long-term inflation expectations may be seen as vindication for officials at the Federal Reserve who have viewed the recent energy price spike as having a temporary effect on inflation. “The Fed is not going to see inflation as a threat so they have the freedom to keep interest rates low longer,” said David Wyss, chief economist at Standard & Poors Ratings Services in New York. “But core inflation is creeping up from its lows six months ago, so the Fed is going to end its extraordinary measures,” he added.