The Latest Inflation Story From China and Europe

Some interesting data from overseas, complicating some of the tasks of central bankers.  As always, take government data with many grains of salt, especially the Chinese type.  But “officially” inflation fell from 6.2% to 6.1%.  This is down from the peak 6.5% seen this summer, but food inflation continues to be an issue at 13.4% – flat with the previous month.  Looks like some bad weather in China was an issue on the food front.

  • Food prices rose 13.4 percent in September from a year earlier, the same pace as in August, as pork costs jumped 44 percent, today’s report showed. Non-food inflation cooled to 2.9 percent from 3 percent.

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More interesting, is Chinese lending fell to its lowest level in 3 years.  Of course part of this is purposeful as the government has been trying to slow down the economy, but it will be interesting to see how far they take it, and when they reverse course.

  • China’s bank lending last month was the least since 2009 as inflation stayed above the government’s target, highlighting the risk that efforts to tame prices will trigger a slowdown.  New loans were 470 billion yuan ($73.7 billion), central bank data showed today.
  • M2, the broadest measure of money supply, rose 13 percent from a year earlier, the least in almost a decade, and data for foreign-exchange reserves pointed to capital outflows.
  • The central bank “is now between a rock and a hard place,” said Liu Li-Gang, an economist at Australia & New Zealand Banking Group Ltd. (ANZ) in Hong Kong. “Inflation is high which means monetary conditions need to be tight but with a lot of bank lending happening off balance-sheet, conditions in reality aren’t as tight as would appear from this data.”

Over in Europe an interesting dilemma – the ECB has a single mandate; price stability.  Inflation has surged to the highest level in 3 years – yet pressure is on the ECB to cut rates.   That’s a bit of a rock and a hard place, but as we’ve seen in the UK, they’ve dismissed levels of inflation far above target for many quarters in a row, and continue to ease.  Now Germans are not British, but with an Italian headed to the top of the ECB next month, we’ll see how influential the hawks are.

  • European inflation accelerated to the fastest in almost three years in September on soaring energy costs, complicating the European Central Bank’s task as it combats the region’s sovereign-debt crisis.
  • The euro-area inflation rate jumped to 3 percent last month from 2.5 percent in August, the European Union’s statistics office in Luxembourg said today. That’s the biggest gain since October 2008 and in line with an initial estimate published on Sept. 30. Energy costs jumped 12.4 percent in the period.
  • Euro-region core inflation, which excludes volatile costs such as energy, quickened to 1.6 percent in September from 1.2 percent in the previous month, the statistics office said.
  • In Germany, Europe’s largest economy, inflation quickened to 2.9 percent in September from 2.5 percent in the previous month.
  • The ECB, which aims to keep annual gains in consumer prices just below 2 percent, said last month that euro-region inflation would probably average 2.6 percent this year and 1.7 percent in 2012.
  • ECB President Jean-Claude Trichet, who will be replaced by Italy’s Mario Draghi when he retires at the end of the month, said last week that euro-region inflation is “likely to stay above 2 percent over the months ahead” before easing. Risks to the price outlook are “broadly balanced,” he said.

Trader Mark is the author of Fund My Mutual Fund.

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