Inflation: Key Risk to Global Outlook

Date: February 22, 2011
Pages: 46
US$ 1,295.00
Report type: Strategic Report
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The Challenge Of Rising Commodity Prices A combination of improving economic growth, loose monetary policy, and supply-side considerations from tight commodity markets is boosting consumer prices worldwide. Inflationary pressures are being felt most keenly in emerging markets (EM), where policymakers will have to find a balance between tightening measures intended to contain prices on the one hand, and maintaining export competitiveness and sustaining growth on the other. Our core scenario is that headline inflation should not be so much of a worry as we approach H2 2011, as commodity prices ease off and EM policy tightens. But the risks of commodity price spikes and upward wage pressures should not be underestimated, and could yet create significant headwinds to the ongoing global recovery.

Inflationary pressures are building across the Asia-Pacific region, with China's consumer price index (CPI) set to rise further from the 4.6% y-o-y December reading in the months ahead. Indonesia, which hiked it benchmark BI rate on February 4 to prevent real interest rates from turning increasingly negative, will be forced to do so again before long. Aside from higher food and commodity prices, hot money inflows into Asia are being multiplied by the broadly stable banking systems and strong growth opportunities. China, Indonesia, Vietnam and India are the most at risk from a near-term surge in price pressures.

Rising inflationary pressures are creating policy dilemmas for Emerging European central banks.

Wary of the rising interest rate differentials with developed economies, central banks in Central Europe and Turkey will tread carefully as they seek to avoid 'hot money' inflows over the course of 2011.

However, we attribute higher inflation in the region largely to supply-side pressures and caution that a public backlash and U-turns on fiscal austerity cannot be ruled out entirely.

Rising consumer inflation is having a pronounced impact on our outlook for political risk throughout the Middle East and North Africa (MENA).

Countries with elevated food price inflation and weak public finances are most at risk from experiencing large-scale public unrest in our view. The political situations in Egypt and Tunisia are still clouded with uncertainty, and Iran is a potential flashpoint of instability going forward. By contrast, countries throughout the Gulf Cooperation Council are least at risk from experiencing inflation-induced political upheaval. Not only is food price inflation markedly lower throughout the GCC, but living standards are also considerably higher.
inflation: key Risk to Global Recovery
Executive Summary
the Challenge of Rising Commodity Prices
Global Overview
key Risk to Global Markets
Chart: Price Pressures Picking up in em
Global Inflation, % CHG Y-O-Y
Monetary Policy: Increasingly Divergent
big Risks in Both Directions
Chart: Chasing Higher Returns in em
net Portfolio Flows, Us$bn
  Table: Consumer Price Inflation, % CHG Y-O-Y
Indicators: Argentina, Brazil, China, Eurozone, Germany, Hong Kong, India, Indonesia, Japan,
Malaysia, Mexico, Nigeria, Russia, Saudi Arabia, Singapore, South Africa, South Korea, Taiwan,
Thailand, Turkey, United Kingdom, United States
Chart: Still Some Room Until Full Capacity is Reached
Global Inflation & Output Gap
Chart: a Clear sp lit Since Lehman Collapse
Global cpi Indices, Rebased September 2008 =
Table : Consensus Forecasts
Indicators: 2011: Bloomberg Consensus, BMI 2012: Bloomberg Consensus, BMI
Asset Class Views: Currencies Aside, Wary of EM
Chart: Fighting the Tide
Foreign Reserves, Us$bn
Global Assumptions
the Outlook for 2011
Growth Solidifies, but Inflation Poses a Threat
  Table: Global Assump Tions
Indicators: Real gdp Growth (%), Consumer Inflation (AVG), Interest Rates (eop), Exchange Rates
(AVG), Oil Prices (AVG)
Developed States
Table : Global & Regional Real gd p gro wth % CHG Y-O-Y
Indicators: World, Developed States, Emerging Markets, Asia Ex-japan, Latin America, Emerging
Europe, Sub-saharan Africa, Middle East and North Africa Developed Market Exchange Rates:
Eurozone, Japan, Switzerland, United Kingdom Emerging Market Exchange Rates: China,
South Korea, India, Brazil, Mexico, Russia, Turkey, South Africa
Emerging Markets
  Table: de Velo ped States Real gd p gro wth Forecast
Indicators: Developed States Aggregate Growth: g7, Eurozone, Eu-27 Selected Developed
States: Australia, Austtria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy,
Japan, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom, United States
  Table: Emerging Markets Aggregate gro Wth
Indicators: Emerging Markets Aggregate Growth, Latin America, Argentina, Brazil, Mexico,
Middle East, Africa, South Africa, Nigeria, Saudi Arabia, Uae, Egypt, Emerging Asia, China,
Hong Kong, India, Indonesia, Malaysia, Singapore, South Korea, Taiwan, Thailand,
Emerging Europe, Russia, Turkey, Czech Republic, Hungary, Poland
Table : Consensus Forecasts
Indicators: 2011: Bloomberg Consensus, BMI 2012: Bloomberg Consensus, BMI
Commodity Strategy
key Themes for 2011
Chart: Grains Outperforming in 2010
Relative Performance of Commodity Groups* S&pgs Sub-indices
Theme 1: Commodities Will Head Higher, but Risks Remain
Chart: Comm Odity Prices to Remain Elevated in 2011
Reuters-jefferies CRB Index
Theme 2: Inflation, FX & Monetary Dynamics Could Result in Trade Policy Risks
Theme 3: Correlations to Weaken
Chart: Back to More Normal Levels?
Correlation Between Copper & the dow (2008-2010)
Theme 4: Looking for Relative Value, Metals to Outperform
Chart: Many Metals to be in Deficit
Market Balance for Several Metals (KT)
Chart: Greater Supp Lyexcept for Corn
Grains Stocks-to-use Ratios (%)
Theme 5: Precious Metals to Remain Bid
Chart: Softs Loosening Slightly in 2011
Stocks-to-use Ratios for Sugar, Cocoa & Coffee
Theme 6: Agriculture Could Underperform, but Huge Upside Risks Exist
Food Price Inflation
Pressures to Ease in Medium Term
Chart: Dragging it Along
China - Consumer Price Index (CPI)& Food Price Inflation (%)
Chart: Rapid up Tick of Late
China - Wholesale Price Index (WPI) Year-on-year %
Rising Food Inflation: a Confluence of Factors
Chart: Lower Stocks
China - Grains Stocks to use Ratio (%)
Inflationary Pressures to Ease
Chart: Ticking up Only Recently
China - Consumer Price Index (CPI) Year-on Year %
Wider Implications
Risks to Outlook
Chart: Soybean in Largest Deficit
China - Grains & Softs Production Balance (‘000 Tonnes)
Chart: Pork vs Poultry
China - Meat Production Balance (‘000 Tonnes)
Overheating Risks Evident
Tightening Back on the Agenda
Business Monitor International Ltd
Special Report
Chart: a Food Phenomenon
India - Wholesale Price Inflation, % CHG Y-O-Y
Chart: on the up
India - Credit & Money Supply Growth, %
Chart: Still low by Historical Standards
India - Real Lending Rates, %
Implications for Forecasts
South East Asia
a Resurgent Region
Inflation Pressures Mounting
cpi Hotspots in Vietnam and Indonesia
Chart: Runaway Inflation in the Making?
Consumer Price Inflation, % CHG Y-O-Y
Warm Spot for Singapore
Chart: Under Control for Now
Consumer Price Inflation, % CHG Y-O-Y
Price Pressures not so Troubling in Other Areas
Chart: no Cause for Concern
South East Asia - Broad Money Supply Growth, % CHG Y-O-Y
Money Supply Growth Manageable.for Now
Chart: Food Vulnerability Exposed
Food as Proportion of cpi Basket, %
Food Prices Starting to be a Worry
Chart: Watch Out
Asia - Policy Rate, %
Mild Rate Hikes Across the Board
ecb on Guard
Inflation, Monetary Tightening Back in Focus
Chart: in his ow n Words: ecb President Jean-claude Trichet
Selected Quotes From January 13 Press Conference
Chart: Credit Recovery is on Track
Eurozone - Money Supply & Credit Growth Indicators
Chart: Headline up , but Core Still Contained
Eurozone - Selected Inflation Indicators
Positive Macro Outlook Underpins the Shift
Chart: the Next Move Will be up
ecb & us Federal Reserve Policy Rates, %
  Table: Euro Zone vat Changes
Indicators: Finland, Greece Ireland, Latvia, Poland, Portugal, Romania,, Slovakia, Switzerland,
Spain, United Kingdom
Chart: the Trend is upw Ards
Eurozone - 5-year Interest Rate Swap, %
Markets: Rate Expectations Will be Crucial Across Asset Classes
Chart: Futures Start Pricing in More Aggressive Hikes
90 day Euribor Future, dec 2011 Contract
Chart: Tighter Conditions Seen
Euribor 90 day Future, dec 2012 Contract
Central and Eastern Europe
Policy Dilemmas Emerging
Implications of Rising Inflation
Chart: Staple Goods Weighing on Consumer Pockets
Europe - Hicp Food Prices (dec-09=100)
Chart: Only Gradually Ticking Higher
Europe - Core Inflation (excl. Energy and Food Prices), % CHG Y-O-Y
Chart: Poorer Countries to be hit the Most
Europe - Coicop Food & Transport Costs Weightings in Hicp Index
Mostly Supply-driven Inflation
Chart: Keep an eye on Social Stability
Europe - Short-term Political Risk Ratings (lhs Represents Overall BMI Country Ranking)
Watch out for Political Unrest
Chart: Energy Costs Rising
Europe - Hicp Transport Prices (dec-09=100)
Fiscal Consolidation at Risk?
Risks to Outlook
Middle East and North Africa
an Angry Neighbourhood
Inflation and Political Risk
Chart: Tracking Wheat Prices Closely
Mena - top Global Importers of Wheat
Chart: Egypt and Iran Most at Risk
Mena - Ratings for ‘inflation’ Sub-component in Short-term Political Risk Ratings
Chart: sp Otting the Outliers
Mena - Ratings for ‘social Unrest’ Sub-component in Short-term Political Risk Ratings
GCC Less at Risk
Chart: GCC Less at Risk
Mena - CPI Figures, % CHG Y-O-Y
who can Absorb the Price Shocks?
Rising Commodity Prices
Consequences and Implications for Ssa
Chart: Near Record Levels
fao Food General Food Price Index
Chart: a Mixed Bag
Food Price Index Sub-groups (% Change YTD)
Food Prices
Chart: Deficit is the Norm
Africa - net Trade Position in Food* 2001-2008 (% of GDP)
Which Countries are Most Exposed?
Chart: an Incomp Lete Picture?
Africa - Nominal Gdp/capita, Average 2001-2010 (us$)
Business Monitor International Ltd
Special Report
Chart: Wealthy Countries are Less Exposed
Africa - Weighting of Food in CPI (%)
how Will the Burden be Carried?
Chart: Moving Higher From Here
Africa - Regional Inflation, % CHG Y-O-Y
Latin America
Central Bank Credibility Tests
key Risks and Core Scenarios for 2011
Chart: Food Prices end 2010 at Record Highs
Unfao World Food Price Index
Market Risks: Policy Dilemmas Ahead
Chart: Currency Strength Across the Region
Latin America - Currencies, Rebased (2009=100)
Chart: Inflation Expectations sp Iked
Chile - 2 Year Inflation Breakevens
Macro Risks: the Winners and Losers
Chart: Local Debt Selling Off
Latin America - Brazilian Benchmark 10-year Bond, ytm (top) & Colombian Benchmark 10-year
Bond, ytm (bottom)
Political Risks: Strength of Government is Key
Chart: Already at Risk
Central America - Short & Long-term Political Risk Ratings
Chart: Extractives Looking Strong
Latin America - Real gdp Growth Forecasts (%) 2011-14, by Category
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