China's Inflation Is A Monetary Phenomenon

Here is a good chart from todays WSJ (“China's Inflation Is a Monetary Phenomenon”) highlighting the growth in China’s M2 since 2002 and the recent surge in food inflation. As demonstrated in the chart below, M2 growth peaked last November at approximately 30%. Given that inflation generally lags M2 growth by 12-18 months, we are now only starting to see the effects of last year's massive lending binge work their way through China's CPI data.

A big theme for the year ahead will be how aggressive China and other emerging market central banks are in tamping down inflationary pressures that are clearly bubbling up in their economies. Should central banks accelerate their recent tightening measures, we could see global economic growth fall well short of the more bullish forecasts starting to gain sway with investors (though the lagging effect of these actions suggests this will be more of a 2H 2011/1H 2012 problem).



For a similar article on the inflationary pressures building up in Brazil see another article from today's WSJ - "Inflation Dilemma Looms for Brazil's Rousseff."

On the campaign trail, Ms. Rousseff promised to lower Brazil's sky-high interest rates. But in order to tamp down inflation, Brazil's central bank is getting ready to raise rates, not lower them, economists say. Central bank directors are meeting Wednesday to discuss potential rate increases. Many Brazilian economists expect the country to boost its 10.75% interest rate—among the highest in the world—by the end of January at the latest....

Inflation picked up as Brazil's government took on more debt to boost spending after the global financial crisis. The stimulus helped Brazil weather the downturn. But two years later, the stimulus spending has juiced up Brazil's natural growth rate of around 4.5% to a China-like 7%, creating inflation along the way.

"The inflation issue requires a policy response," says Marcelo Carvalho, who follows Brazil at BNP Paribas in São Paulo.

Brazil's Finance Minister Guido Mantega, who is set to remain in his job once Ms. Rousseff takes office, said this week that the federal government will introduce a series of inflation-fighting spending cuts.