Category Archives: inflation

Commodity and Oil Price Shocks

Headwinds for the economy as the price of oil skyrockets.

While some put the unrest in the middle east down to a popular yearning for the ability to vote the Muslim Brotherhood and similar groups into power the reason is more prosaic: rising prices, especially food and other basic commodities.

One year corn price chart:

Corn Futures

One year wheat:

Wheat Futures

Not just food:

Cotton Futures

Importantly for Indonesia, rice, has not quite joined the party, yet, although famed investor Jim Rogers is 'bullish' on it, which is a bad sign...

Rice Futures

And now oil; three month crude oil futures:

Crude Oil Futures

Now above the key $100 level, with some, such as Jim Rogers again, forecasting $150 oil soon.

Background: the 2008 stockmarket crash in the US was preceded by a massive liquidity shortage among large banks; the US Federal Reserve's response to this was "quantitative easing", a policy to increase liquidity, basically print more and more dollars, to encourage fearful banks to start lending again, spur on economic activity and prop up the stock market; when liquidity increases, so does inflation, and because the dollar is still the world's reserve currency, this inflation gets exported all over the globe, resulting in the rising basic commodity prices as above.

Back to oil. 'Premium' fuel is subsidised to the tune of about 40% at the pump in Indonesia. The 2010 budget allocated 88.9 trillion rupiah for subsidies, while at this year's budget the subsidy had to be increased to 95.9 trillion, but this figure was based on an average oil price of $85 per barrel, well below the current level.

Hatta Rajasa, the coordinating minister for the economy, said in late February that a plan to reduce the subsidy had had to be shelved, due to the rising cost of oil, thereby guaranteeing a much higher burden for the state.

In neighbouring Thailand they have a similar issue with fuel subsidies, but seem to be coming to the reverse conclusion as to what to do about it: Thailand may remove oil subsidy as fund runs out

Thailand's state Oil Fund has fallen to about 7 billion baht ($230 million), the Energy Ministry said on Friday, suggesting the government may soon remove a fuel subsidy

So there is a bind: reduce the subsidy to save money/maintain finances (possible Thai route), or maintain the subsidy to.... lighten the burden of the people/prevent civil unrest (Indonesia).

We shall see which is the wiser policy.

Commodity and Oil Price Shocks is brought to you by Indonesia Matters, where you can book flights in Indonesia, and features listings of Indonesian hotels, like Kuta hotels, Sanur hotels, hotels in Jakarta and near Jakarta airport, and more.

Higher inflation rates are playing havoc in real estate sector in India

Higher inflation rates are playing havoc in yet another sector. This time it is real estate. To contain the ever rising inflation, the RBI (India) has been hiking interest rates. And it plans to continue doing so in the near future as well. This has led to higher cost of borrowing funds, which in turn has led to a slack in the demand for homes. Net result being that prices for homes in major cities are expected to drop by as much as 30%. 

This is definitely exciting news for those who are seeking to buy a home. But the point is that when the funds are so expensive, how will these people fund the purchase? This would just lead to demand dwindling. So is this the end of the real estate bubble at least for the major cities? Looks like it. 

Equitymaster Agora Research Private Limited
103, Regent Chambers,
Above Status Restaurant,
Nariman Point, Mumbai – 400 021. India.

A crisis as big as the subprime one is brewing in Asia

In 2009 and 2010, Asia was the apple of the investor’s eye as countries in the region recovered strongly from the global financial crisis to post healthy growth rates. But loose monetary policies in the West and high inflation have posed its own set of problems for the Asian economies. The biggest problem that Asia has been witnessing in recent times is the surge in food prices. And this issue could end up being more chronic rather than cyclical in the years to come. For starters, weather patterns have become unpredictable which in turn has hampered agricultural production of late. Then there is the issue of population. Asia alone, for example, will have another 140 million mouths to feed over the next four years. That is in addition to the almost 3 billion people in the fast-growing region currently. This means that demand will remain high in the future and supply may not always catch up.

The other big fallout of soaring food prices for the Asian region is likely to be a significant rise in debt. So far, it was believed that bloated debt was a problem that only Europe and the US were facing on account of the global crisis. But Asia is also likely to join this bandwagon. Take India for instance. It still has one of the highest proportion of poor in the world. This obviously means that most will not be able to afford food at such high rates. As a result, the Indian government would most certainly increase subsidies sharply and cut import taxes, which would put an additional strain on its finances.

Indeed, the crisis in Egypt was a product of the inability of the Egyptian government to tackle the problem of high inflation. And though extreme, noted economist Nouriel Roubini believes that persistently high food prices and inflation could raise the risk of more governments getting toppled. Certainly, Asian governments including India will have to give serious thought to some long term reforms if such shocks are to be avoided in the future.

Do you think that rising food prices will lead to a bigger crisis in Asia in the future?

Equitymaster Agora Research Private Limited
103, Regent Chambers,
Above Status Restaurant,
Nariman Point, Mumbai – 400 021. India.

Beware of Inflation

Beware of inflation.

The longer you leave your money in fixed deposit, the higher the risk of inflation eating away the purchasing power of your money.

Money market investments are safest when the money is needed in the short-term.

The very same safe investments become high risk the longer they stay invested.

Stocks are on the opposite track. They are high risk investments in the short-term, but are lower risk investments in the long term:

Fixed deposit 
1yr = Low risk 
10 yrs = High risk

1 yr = High risk 

10 yrs = Low risk

Interest rates ‘will have to rise sixfold in two years’

Interest rates will have to rise almost sixfold over the next two years to cope with rising inflation, business leaders have warned.

Interest rates will rise six fold in two years

Interest rates will rise six fold in two years 
It will bring financial pain to seven million home owners with floating interest rates who will see a jump of almost £200 on a typical monthly mortgage payment.
Charities have already warned that repossessions are likely to rise next year and the threat of a succession of quick interest rate rises will exacerbate their fears.
The Confederation of British Industry predicts that higher than anticipated rises in the cost of living will push the Bank of England (BoE) to begin increasing interest rates in the spring.
It predicted that the Bank base rate – the interest rate at which the BoE lends to other banks – will rise more than two percentage points by the end of 2012. Mortgage rates are expected to follow closely behind.
“Many households have been benefiting (from the low interest rates) in terms of mortgage payments, but that will start to turn over the next couple of years,” said Lai Wah Co, the CBI’s head of economic analysis.
The organisation predicts that the Consumer Prices Index, the Government’s preferred measure of inflation, will reach 3.8 per cent within the first three months of next year and that it will still be well above the Bank’s 2 per cent target two years from now. It currently stands at 3.3 per cent.
The CBI expects interest rates to climb from their record low level of just 0.5 per cent in the second quarter next year.
It forecasts rates will rise 0.25 percentage points each quarter before the pace doubles in the middle of 2012 to 0.5 point increases, taking the bank rate to 2.75 per cent by that year’s end.
Last week, the Bank of England warned in its Financial Stability Report that two thirds of borrowers are now on floating interest rate deals and the proportion is rising. At the height of the credit crisis in 2007, the proportion stood at less than half of all outstanding mortgages.
A 2.25 per cent rise in mortgage rates would see the monthly repayments on a typical £150,000 mortgage increase from £909 to £1096.
In another blow for home owners, economists predict that the average value of a home in Britain will lose 10 per cent of its value from their peak levels earlier this year to the end of 2011.
The house price gains seen at the beginning of this year have already been wiped out, according to Nationwide.
Britain’s biggest building society said the average price of a home dropped 0.3 per cent in November, the equivalent of almost £1,000 in a month, bringing the average price of a home to £163,398.
The CBI expects inflation as measured by the retail prices index – which includes more housing costs – will follow an even higher path than CPI, reaching 5 per cent at the start of next year.
The CBI said it had raised its quarterly forecasts to take into account the “persistent strength” of energy and commodity prices.
High inflation will put further pressure on households as people face higher prices and mortgage rates, but pay packets struggle to keep pace.
Tim Moore, an economist at research group Markit, said: “December brings to a close another difficult year for household finances. The UK economy looks to have avoided a double-dip recession in 2010, but there is little evidence that household finances have even begun to recover. People have seen their spending power gradually eroded by stubbornly high inflation throughout the year and little in the way of income growth to compensate for this.”

Inflation beating investments

Inflation beating investments

Inflation has hit a new high, but there are options for income seekers.
By Emma Wall 8:00AM GMT 18 Dec 2010

Inflation has hit a new high, with Britain’s cost of living rising at the fastest pace seen in six months. The Government’s official measure of inflation, the consumer prices index (CPI), hit 3.3pc in November and, even more worryingly, the retail prices index (RPI), which some consider a more accurate inflation reading, rose to 4.7pc last month.

This is another nail in the coffin for Britain’s savers. The average easy-access savings account is paying 0.81pc – the effect of the Bank Rate remaining at just 0.5pc since March last year – and making it almost impossible for people to live off the income from their cash savings.

Experts are urging income-chasers to turn to equities, saying the average yield from FTSE 100 companies is more than 3pc and some income funds promise 7pc. Equities do not carry the same guarantees as savings in a cash account, but if you choose the right investment vehicle, income from savings could again be a viable option.

There are two main avenues through which to gain a yield from investing – shares that pay dividends or funds. The UK has some of the best stock markets for dividends.

Nick Raynor, the investment adviser at The Share Centre, likes Chesnara, an underwriter for life assurance products, now at 210p a share and offering a yield of 7.5pc. Royal Dutch Shell “B” is £19.41 a share and offers a yield of 5.6pc.

He also tips Aviva, at 366p, yielding 7.9pc: “Recent weakness in the share price takes the yield to almost 8pc, and the dividend is stable. We believe next year will see the dividend continue to rise.”

Mr Raynor also likes Vodafone at 163p a share and offering a yield of 4.8pc and property company British Land at 484p, yielding 5.6pc.

European companies also offer attractive dividends. France Telecom paid a dividend of €1.40 last year – a yield of about 8pc.

If you want to leave stock picking to experts, choose an income fund. There are straight equity income funds, bond funds and those that invest in a mixture of the two. Equity income funds hold a selection of companies for a chosen region, such as UK, Europe, emerging markets or global funds.

There are fewer dividend-paying companies in the emerging markets region, but the number is increasing, and as it does more funds are expected to launch.

There are 75 UK equity income funds, with the top-performing over the past five years being Halifax UK Equity Income. Based on £1,000 invested, with the income accumulated, the Halifax fund has returned 42pc.
Troy Trojan Income, Unicorn UK Income and Aviva Investors UK Equity Income funds have all returned more than 35pc in the same period.

If you are after an even bigger rate of interest, you could try an enhanced income fund. This is a fund that operates in tandem with a traditional income fund and sells call options on the income fund’s holdings.
Enhanced income funds aim to generate a higher income (typically a yield of 7pc a year compared with the average income fund that is now yielding 4.8pc), but at the cost of sacrificing some of the capital growth associated with shares – and they do this using complex derivatives known as options. The funds sell options, for which they receive a fee, on shares held in the portfolio based on a prediction of how the share price will rise in a three-month period.

Enhanced income funds are able to offer much higher yields than traditional income funds because of the fee they get for selling the option. There are only a handful on the market, but there are plans to launch more.

Opinions are divided as to whether they carry a higher risk than traditional income funds. Michael Clarke, the manager of Fidelity’s Enhanced Income fund, said he tried to ensure as safe an investment as possible.

In opting for high income, you also lose out on capital growth, so investors need to weigh up whether they are prepared to limit capital growth potential for a little bit of extra yield. Schroder Income Maximiser yielded 7.18pc in the past year, Fidelity Enhanced Income 7.39pc, Newton Higher Income 7.97pc and Insight UK Equity Income Booster 8.76pc.

Is it time to take a chance on shares?

Is it time to take a chance on shares?

With the banks offering pitifully low interest rates, more investors are switching their attention to the stock market, says Ian Cowie.

F&C dropped out of the FTSE 250 earlier this year Photo: AFP

By Ian Cowie 8:27PM GMT 15 Dec 2010

Most people regard inflation as a bad thing, and many may be puzzled about why the stock market is hitting new highs at the same time that inflation is accelerating. The explanation is that while inflation robs savers in bank and building society deposits by reducing the real value or purchasing power of the money they set aside, investors in shares can point to more than a century of evidence that this way of storing wealth can cope with rising inflation by increasing dividends and capital growth.

Savers have good reason to resent being punished for their thrift. Some may feel even worse when they realise that the Government is one of the beneficiaries of inflation, because it not only reduces the real value of savings but also of debts – and the Government is the biggest debtor in Britain.

With a massive deficit in public finances, gradually debauching the currency appears to offer a relatively painless way to float off the rocks of debt. Pensioners are less likely to protest about the stealthy erosion of their savings than younger people are to riot about reduced state handouts or higher interest rates. The problem is that trying to have a little bit of inflation is like trying to get a little bit pregnant; things soon get out of hand.

For example, just over a year ago – in October 2009 – the Retail Prices Index (RPI) measure of inflation was actually negative. The annual rate of change was minus 0.8 per cent and had been minus 1.4 per cent the month before. By contrast, the RPI is now rising at 4.7 per cent.

If that sounds like small beer compared with inflation seen in the 1970s, then beware: even today’s rate of erosion would be enough to halve the purchasing power of money in little more than 15 years. That’s much less than the 22 years and six months the average man can now expect to spend in retirement, according to the Office for National Statistics. Or the 24 years and eight months that awaits the average woman at retirement. So there is nothing theoretical about the problem inflation presents to pensioners.


Worse still, the Government plans to reduce the indexation – or statutory protection against inflation – that pensioners receive in future. From next April, all public sector pensions will be uprated in line with the Consumer Prices Index (CPI). This produces a lower measure of inflation by excluding mortgage costs and council tax and is currently rising at 3.3 per cent. From April 2012, the Basic State Pension will also switch to CPI.

Cynics argue that rising inflation should come as no surprise, since the Government’s main tool for fighting the global credit crunch has been quantitative easing – akin to printing more money. The signs were also there when the Bank of England switched most of its staff pension fund into index-linked or inflation-proofed government gilt-edged stock, as reported by the Telegraph in April last year. And when National Savings & Investments abruptly ceased selling index-linked certificates in July, that removed the only risk-free way for individuals to protect their savings from inflation. Talk about taking the umbrella away, just as it started to rain.

Fortunately, history offers some comfort for those willing to accept varying degrees of risk in order to preserve the purchasing power of their money. According to Barclays Capital, shares reflecting the broad composition of the London Stock Exchange have provided greater real returns than deposits over three quarters of the periods of five consecutive years since 1899. Shares also beat fixed-interest bonds in 75 per cent of all those five-year periods during a century which, remember, included the Great Depression and two World Wars.

While the past is not a guide to the future, the historical evidence shows that the probability of shares doing better than bonds and deposits increased over longer periods. For example, over all the 10-year periods, shares delivered higher returns than deposits 92 per cent of the time, and beat bonds 80 per cent of the time. But shorter term stock market speculators took bigger risks – for example, deposits did better than shares in a third of the periods of two consecutive years.

Against all that, perennial pessimism remains the easiest way to simulate wisdom about stock markets. That’s why many experts have been calling the top of this market all the way up. Despite having missed the start of this bull run, they argue that shares are now too high – even though they do not look expensive on some tried-and-tested means of assessing value. The average price of the shares that constitute the FTSE 100 index is now 12 times their average earnings per share. By contrast, the same price/earnings ratio exceeded 31 by the time the FTSE hit its all-time peak of 6,930 in December 1999.

More importantly for income-seeking savers, the average yield – or the dividends paid by shares expressed as a percentage of their price – is now slightly above 3 per cent. But, when prices soared to unsustainable levels a decade ago, the yield on the FTSE 100 slumped to less than 2 per cent.

It’s worth stressing that the yield on shares is quoted net of basic rate tax, so 3 per cent net is even more attractive than it may at first appear by comparison with bank deposits, which are quoted before tax. The FTSE 100 yield is also six times Bank of England base rate and, while returns on deposits remain frozen and inflation continues to rise, there is every chance that the FTSE 100 could hit 6,000 soon.

If that sounds far-fetched, here’s what I wrote in The Daily Telegraph in August 2009, while the index still languished below 5,000: “After all the worldly-wise men’s warnings of a double-dip recession, it should be no surprise to see the FTSE 100 soar. If anything, the continued consensus among most market observers that this remarkable rally has ‘gone too far, too fast’ should boost our hopes the index will breach 5,000 soon.
“The reason is that economies tend to grow over time and shareholders own the companies that create this wealth. So, medium to long-term savers – like those of us saving toward paying off the mortgage or funding retirement – need not worry too much if share prices fall next month. That might be a problem for fund managers, who must answer to a board of directors every few weeks, and an opportunity for the rest of us.

“Finally, it is worth considering the personal anxiety of many professionals who are now ‘short of the market’ or holding cash rather than shares. They can only afford to sit and watch prices rise for so long before they feel compelled to join the fun and keep their jobs.”

Shares and share-based funds are not as cheap as they were in August last year. But, as more people have come to feel that the credit crunch is not the end of the world after all, the penny has dropped and inflows of capital from bank deposits into the stock market have pushed prices up.

That raises the risk that buyers today could lose money if prices fall. This is a real danger with shares, which means nobody should invest cash they cannot afford to lose in the stock market – and, as mentioned earlier, the shorter your time horizon, the bigger the risks.

Two ways to diminish these risks are to commit funds for five years or more and to diversify.

By contrast, frozen interest rates and rising inflation mean most supposedly risk-free bank and building society deposits are now a certain way to lose money slowly.

There is little point saving if returns fail to match the rate at which inflation erodes the purchasing power of money. So, while shares and share-based funds offer no capital guarantee, rising numbers of people who must live off their savings or use them to supplement pensions should consider some long-term exposure to shares and share-based funds.

Inflation does matter in China and the world

Inflation does matter in China and the world
By Huang Shuo (
Updated: 2010-11-15 16:58

The growth rate of China’s consumer price index (CPI) was 4.4 percent year-on-year in October, a 25-month high. The rate is up 0.8 percentage points from September. This is an alarming statistic for a country that for the past three decades has had steady economic growth. Inflation risks do matter for China.

In particular, the new factor of a rise in prices, main promoter for CPI growth, took up 3 percentage points of the 4.4 percent surge. Prices of agricultural products and food have been playing major roles in contributing to the CPI hike. Food prices surged by 10.1 percent compared with the same period of last year as a result of the price hike in international agricultural products, and the recent flood in South China’s Hainan province affected vegetable prices and oil prices, adding to the product costs, said Sheng Laiyun, spokesman for the National Bureau of Statistics (NBS).

In addition, daily essentials such as eggs and vegetables are leading the price increases in China’s consumer market, followed by meat, oil and white sugar.

As the industry generally expected that about 4 percent would be the proper answer for CPI, the final data released by the NBS on Nov 11, 2010, was 0.4 percentage points higher than estimated, which astonished the public and drew lots of attention from domestic and foreign experts.

Consumer prices associated with social stability are the top concern of the public in China. The increase of CPI indicates that the surge in commodities prices is ongoing in the consumption market, closely linked with the daily lives of ordinary people. China’s income per capita still lags behind the United States, the European Union, and even some other emerging economies. How to increase income and stabilize or lower the prices in the market, especially for daily essentials, should be attached great importance by the government.

Livelihood is like the basis for constructing a building, which lays the firm foundation for a harmonious society. Whether people can lead a good life decides the quality of governance by central and local authorities. High consumer prices pose an unstable economic factor to improving the living standard of people.

More regulations are expected for the soaring Chinese CPI. As to that situation, the People’s Bank of China, the central bank of China, has noticed and adopted a measure increasing the required reserve ratio by 50 basis points and coming into effect on Nov 16, 2010, in order to ease the pressure from the second round of quantitative easing policy (QE2) by the Federal Reserve of the US and increasing liquidity caused commodity prices to rise in China. But is it enough to merely depend on national economic regulatory authorities?

Every economy released loose monetary policies to conquer the challenges brought by the international financial crisis in 2008 and get out of the recession. But side effects are inevitable. Rising inflation is one of the consequences. As a result, countries with expansion policies on issuing more currencies should work together and reach agreements to confront the emerging side effect — inflation.

The author can be reached at

China rate rises no panacea to curb inflation: PBOC adviser

China rate rises no panacea to curb inflation: PBOC adviser
Updated: 2010-11-18 11:06

China should not solely rely on interest rate rises to curb inflation, an academic adviser to the People’s Bank of China said in remarks published on Thursday.

Zhou Qiren, who is also a professor at Peking University, said the government must take steps to tackle supply-side strains that have been a key factor pushing consumer prices.

Loose monetary policy in 2009 has created excessive liquidity and helped fuel prices of various products, he said.

“Much liquidity and fewer goods are the reasons behind inflation. Raising interest rates cannot change such a situation,” he was quoted by the China Securities Journal as saying.

Zhou warned that liquidity had been channeled from the real estate market to other sectors of the economy, after Beijing took harsh measures to prevent a property bubble.

China’s CPI hit a 25-month high of 4.4 percent in October, fuelling expectations of further tightening measures.

The PBOC has ramped up its efforts to tighten monetary conditions in the past month, increasing bank reserve requirements and surprising markets on Oct 19 by announcing the first rate rise in nearly three years.

Related readings
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China rate rises no panacea to curb inflation: PBOC adviser Stocks down on mainland rate worries
China rate rises no panacea to curb inflation: PBOC adviser Rising food costs boost China’s inflation rate to 25-month high
China rate rises no panacea to curb inflation: PBOC adviser Oct consumer confidence falls due to inflation, rate hike

China needs to raise rates to cope with QE2

China needs to raise rates to cope with QE2
Updated: 2010-11-05 11:04

BEIJING – China needs to increase interest rates to curb capital inflows driven by US monetary easing, an official newspaper said in an editorial on Friday.

Although such a move would increase the rate differential between China and the United States, which might by itself attract further cash from abroad, the China Securities Journal argued that raising interest rates would provide a net benefit by cooling domestic asset prices.

“We must not forget the Japan lesson. We must tighten internal policies to deal with external easing so as to avoid the formation of asset bubbles,” the leading financial newspaper said in a front-page editorial.

It said that Japan’s interest rate cuts in the 1980s inflated asset prices and led to deflation when the bubbles burst.

China needs to be wary about asset bubbles because food-driven inflation pressure is on the rise and efforts to ward off hot-money inflows are less effective since other developing countries, including Brazil, South Korea and Thailand, are also trying to impose capital controls, it said.

“From this perspective, it’s necessary for our country to enter a cycle of interest rate rises,” it suggested. “The process of our capital account opening should also be controlled.”

The editorial does not necessarily represent official policy, but it does reflect widespread worries in China about how to cope with a rise in international liquidity after the US Federal Reserve unveiled a fresh round of quantitative easing this week.

China raised interest rates last month for the first time in nearly three years, although the jury is out among economists about whether the next rate rise will come before the end of this year.