Video: Inflation Explained

Here is Omid Malekan back with a video explaining inflation to the layman. You have seen his videos on Bank Bailouts Explained and Quantitative Easing Explained. The QE explained video was especially popular and went viral on the Internet. So now we have his explanation of inflation

Gold at record high, silver at 31-year high as inflation and negative real yields bite

The easy stance of developed economy central banks is driving money into emerging markets and fostering the accommodative stance of those central banks, fearful of more hot money flows or currency appreciation. Easy money in the face of rising inflation is at the heart of the now subdued currency wars. This battle has moved to inflation and potentially to demand destruction. That is why gold and silver are rising so prodigiously. Unless central banks demonstrate that they have the stomach for counteracting this inflation, more money will continue to flow to precious metals

China Data Stronger Than Expected, PBOC Must Move More Aggressively

China data came in stronger than expected, and supports the view that PBOC is moving behind the curve with its gradualist approach and that it needs to get more aggressive. Q1 11 GDP growth slowed slightly to 9.7% y/y from 9.8% y/y in Q4 and 9.6% y/y Q3, but was better than the expected 9.4% y/y. CPI inflation accelerated to 5.4% y/y vs. 4.9% in January and February and 5.2% y/y expected and is a new peak for the cycle. Retail sales accelerated to 16.3% y/y in March vs. 15.8% y/y so overall, the robust real economic backdrop and rising inflation suggests that further tightening will be seen, perhaps matching the path seen in 2006-2007 or even exceeding it. So far, we have seen 100 bp of lending rate hikes that started in October 2010 and 450 bp of reserve requirement hikes that started in January 2010. During the previous tightening cycle, hikes were 189 bp and 1000 bp, respectively

Moody’s cuts China’s residential property outlook

This comes via Market Watch: Moody’s Investors Service on Thursday lowered its view on China’s property sector, warning that a slowdown is underway with credit conditions forecast to tighten over the next 18 months. However, the ratings agency stopped short of affirming the view of some economists that conditions are ripe for a perfect storm

Is China’s hard landing already happening?

If China does continue to tighten to fight inflation as I also indicated I expect they will, the hard landing scenario is definitely something to consider. Early evidence shows that the property bubble is coming off the boil. But it is doing so in a very dramatic way. Note that the scenario postulated by Victor Shih on the allegedly fragile state of China’s FX reserves becomes operative if we see this kind of property crash and loan loss outcome. Shih argues that If China does have a hard landing due to a real estate crash, then capital flight becomes a real risk.

This would crimp growth and could spark civil unrest. China would like to avoid such a scenario

Has oil’s demand destruction already arrived?

What we would like to see is commodity prices falling or stagnating. And that would certainly be the case if demand destruction is already beginning as the IEA analysis suggests. Moreover, QE is ending in June. So that won’t be a factor in inflation expectations. The ‘goldilocks’ scenario would be moderating commodity prices, followed by moderating global growth, followed by an increase in growth as inflation expectations come down

Strongly Rising Inflation in Brazil and Chile, Elections in Peru

In Peru, populist candidate Ollanta Humala won the most votes in the weekend presidential vote in Peru, winning 29.3% so far with 75% of the ballots counted. By falling far short of the 50% + 1 needed to win, a second round vote will be held in June and it looks like Humala will run against Keiko Fujimori, who has 22.9% of the vote.

In Brazil, the weekly central bank survey shows inflation expectations worsening. Year-end IPCA inflation is now expected at 6.26% vs. 6.02% last week. It is clear to us that macroprudential measures are not working, and that the central bank will need to keep hiking the SELIC rate. Expectations should move higher as inflation data deteriorates. Market is looking for a 50 bp hike at the April 19/20 meeting, and we think there is a good chance that the tightening cycle will continue at the June 7/8 meeting as well.

Meanwhile in Chile, USD/CLP remains within striking distance of the 465 level that triggered FX intervention back in early January. The Chile central bank will meet tomorrow and is expected to hike 50 bp to 4.5%, which would pull it even with Mexico in terms of rates. The economic outlook remains strong, and further tightening is expected into next year. The central bank’s most recent inflation report showed a material deterioration of the inflation outlook

Hard landing possible as Chinese inflation spirals ‘out of control’

On Saturday I wrote about the Scylla and Charybdis of anchoring inflation expectations, geared toward developed economies in North America and Europe. You tighten too aggressively and you get unwanted disinflation or deflation. You remain too loose and inflation rises. Inflation expectations are rising but they are still anchored in large part due to labour market slack. China faces a completely different macro environment. The PBoC is well behind the curve and may have to become very aggressive in tightening and revalue their currency. That risks a hard landing

The Scylla and Charybdis of anchoring inflation expectations

I would argue that inflation expectations are rising as we speak. They are still anchored but they will not be if they continue to rise any more. And if inflation expectations become unanchored, it will mean that policy tightening will have to be much more aggressive – and that leads us back to debt deflation in a hurry –exactly the problem CBs wish to avoid. If CBs are prudent, they will not only be aware of this Scylla – Charybdis conundrum, but act in order to keep the global economy away from either outcome

The Curve in the Road

Bernanke (and Dudley) have been testifying that inflation is not an issue. But what signs and maps are they reading? Bernanke specifically invokes inflation expectations as being most important, and he contends they are low. They both note that the “output gap” (more on it later) is still high and that wage inflation is unlikely in a period of high unemployment. But, as Greenspan recently said, “The problem is, none of these indicators will tell you when inflation is about to take hold.”

The Economic Cycle Research Institute wrote what I think is a very powerful editorial about the problem with Fed policy and inflation. I will quote some of the more important paragraphs:

“Central bankers need to stop clinging to policy orthodoxy and pay attention to proven cyclical leading inflation indicators that can actually tell them when inflation is about to take hold. Otherwise, if a well-meaning Fed stimulates the economy for too long, it will let inflation and/or asset prices get out of control, fostering boom-bust cycles that keep long-term unemployment at elevated readings as each short boom ends with a bust that pushes the jobless rate back up.”

Indonesia Rating Upgrade Highlights Positive Backdrop For Currency

S&P upgraded Indonesia’s rating by one notch to BB+, just one notch shy of investment grade. The move puts it on par with the other two agencies, and we think investment grade will be given by at least one of the big three agencies this year. Indeed, the agencies are really behind the curve as our own sovereign ratings model has Indonesia at BBB+/Baa1/BBB+ compared to actual ratings of BB+/Ba1/BB+. Last year, Japan Credit Rating Agency raised Indonesia’s foreign currency debt rating to investment grade BBB-. While JCRA moves usually don’t garner much attention, we think it was important given rising Japan investor interest in Indonesia.

Faber: The Fed will continue to be behind the curve

Marc Faber was on CNBC talking about the intersection of asset markets with monetary policy. His view is that the Fed will be accommodative for the indefinite future, resulting in a move into riskier assets by investors starved for real returns in fixed income. This could be a boon for asset markets in nominal terms.