Friday, January 24, 2014

Inflation Stories of the Week (January 24, 2014)

1. Should We Worry about Deflation? (The Economist): Professor Paul DeGrauwe says that the Euro zone already suffers from debt-deflation dynamics: "Inflation in the euro zone has been declining since early last year and now stands at 0.8%. This disinflation exerts debt-deflation dynamics, which are of the same nature as those analysed by Irving Fisher... It is not yet catastrophically intense, but surely it should be stopped before it gets worse when inflation turns negative."
2. Plunging Rand, Soaring Maize Price to Stoke South African Inflation (Reuters): A weakening rand and record-high maize prices resulting from rain shortfall are causing concerns about upside inflation risks in South Africa. The central bank may raise rates in the next few months.

3. Narcos-Versus-Farmers Feud Spurs Inflation Wagers (Bloomberg): In Mexico, conflict between vigilante farmers and drug gangs in Michoacan state’s lime-growing valleys is expected to increase agricultural prices and inflation.

4. Soaring Rural Wages Created Low-Growth, High Inflation: Morgan Stanley (Economic Times)
"We believe the National Rural Employment Guarantee Act (NREGA) Scheme has been one of the key factors pushing rural wages without matching gains in productivity...

: A note by Morgan Stanley India blames the National Rural Employment Guarantee Act for pushing up rural wages in India without a corresponding rise in productivity. The note says that rural wages grew an average of 18.7% per year over the past 3 years, contributing to a stagflationary environment.

5. Bank of Japan Sticks to Record Easing as Inflation Picks Up (Bloomberg): The recent BOJ statement says the rate of increase in core consumer prices is expected to be around 1.25% "for some time." Interestingly, unlike the previous statement, this one did not include the comment that “there remains a high degree of uncertainty concerning Japan’s economy.” Sales taxes will increase from 5% to 8% in April. Base wages excluding bonuses and overtime fell for the 18th straight month.

6. The Mystery of China's Fading Inflation, Explained (Quartz): Here's a theory about China's slowing CPI inflation rate: "What makes China unlike Western economies is that the government, not the market, determines the interest rates—in other words, the cost of money—on both deposits and loans. By setting them both artificially low, the government shifts wealth from savers to borrowers...As for China’s hapless savers, the closed capital account leaves them unable to invest in much else, so despite lousy rates, they keep stashing their cash in banks. This unfair distribution is why the money supply can surge without juicing consumer inflation."
Soaring rural wages created low-growth, high-inflation: Morgan Stanley

Soaring rural wages created low-growth, high-inflation: Morgan Stanley

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