The inflation news from the United States was absolutely benign yesterday, March 18.
Can’t say the same for a big piece of the developing world. Inflation is on the loose from China to India.
The only question is Will somebody important to the global economy wreck the recovery in an effort to fight inflation that threatens to run out of control?
For the moment at least, inflation in the U.S. looks like it’s under control. In February the CPI (Consumer Price Index), once seasonally adjusted, was flat. That puts this headline number at a 2.1% increase for the 12-month period. Core inflation, which takes volatile energy and food costs out of the number (and is useful, I assume, mostly to economists who don’t eat or drive) is now running at an annual rate of 1.34%.
The Federal Reserve doesn’t use CPI as its inflation benchmark (It prefers a measure called Personal Consumer Expenditure or PCE.) but translating from the Fed’s calculation suggests a core CPI target of 2% to 2.5%. At an annual rate of 1.34%, the core CPI isn’t even close to the Fed’s inflation limit.
The inflation picture couldn’t be more different in China, India, Vietnam, the Philippines, and other countries in the developing world.
Inflation at the consumer level ran at an annual 2.7% in China in February, up from 1.5% in January. The 2.7% rate might be deceptively high because of the effects of the week-long Lunar New Year holiday in February. But inflation at the producer, or wholesale, level suggests that the consumer number is indeed as bad as it seems. China’s Producer Price Index climbed at an annual rate of 5.4% in February. That was a big jump from the 4.3% annual rate in January and a huge increase from the 1.7% annual rate in December. Since consumer prices usually follow producer prices the February jump is bad news for China’s effort to keep consumer inflation under the 3% target set recently by Chinese Premier Wen Jiabao.
The inflation picture may be even worse in India. In February the wholesale price index, India’s inflation gage, climbed to an annual rate of 9.89% from 8.56% in January. “I will not be surprised if we have a double-digit inflation by March. We are primarily concerned with food inflation. It has to be tackled,” Finance Minister Pranab Mukherjee said during the discussion on the budget for the fiscal year that begins in March 2010.
And tackle inflation is what the Reserve Bank of India did on March 20 by raising the rate that banks pay to borrow from the central bank by 0.25 percentage points to a 5% rate.
And these aren’t isolated cases. Inflation in Vietnam has doubled in the last seven months to an annual rate of 8.5%. In the Philippines, where inflation indexes were flat in mid-2009, the inflation rate has climbed to an annual 4.2%.
China is the country that worries me most.
First because its economy is the marginal consumer for many of the world’s commodities and the global economy—and investors—are counting on China to keep growing at better than 8% a year. Fighting inflation could jeopardize that growth rate.
And second because labor shortages in China’s export engines, coastal provinces such as Guangdong and Jiangsu, have set off a bidding war for workers that threatens to generate a classic inflationary wage spiral. (The labor shortage is a result of national programs to increase economic activity in the inland provinces that used to provide the bulk of migrant labor for coastal factories. More of these workers are simply staying home and working there.)
On March 18 Guangdong, China’s biggest exporting province, announced an increase in the provincial minimum wage of about 20%. That brings wages in the province back into line with wages in Jiangsu, Guangdong’s big export rival. Jiangsu raised its minimum wage by 13% last month. The increase brings the average monthly pay—after adding in bonuses based on output—to a little less than $300 at current exchange rates.
As you might imagine a 20% increase in the minimum wage has set off a firestorm among employers in the two provinces. Take this survey with a grain of salt, therefore, but research by the China Council for the Promotion of International Trade shows that for 1,000 labor intensive exporting business surveyed profit margins were as low as 3%. Despite those reportedly low profit margins, exporters in Guangdong exported $53 billion in goods in January and February 2010. That was up 22% from the same two month period in 2009.