Fear of Inflation Spreads Throughout Emerging Markets

Inflation jitters spread through emerging markets earlier this week, prompting China's central bank to raise interest rates for the third time in four months amid worries that a drought threatening the country's wheat crop will put further pressure on global food prices. China's move is just the latest by emerging-market governments, several of which are deploying policies to battle inflation fuelled by rising food and commodity prices, and growth that is threatening to outstrip their productive capacity, says the Wall Street Journal.

In Brazil, Latin America's largest economy, the government reported Tuesday that inflation is accelerating, leading markets to expect its central bank to increase its overnight rate, already at 11.25 per cent.

In contrast to emerging markets, inflation in the United States remains low – below the Federal Reserve's informal 2 per cent target – despite rising commodity prices.

But an improving growth outlook for the United States and the risk that rising food and energy prices will spill over into other goods and services have bond markets pushing up long-term rates and moving up their expectations for a Federal Reserve rate increase.

Yields on U.S. Treasury’s have been rising, and on Tuesday hit 3.721 per cent, the highest since April.

Source: Bob Davis and Aaron Back, Inflation Worries Spread, Wall Street Journal, February 9, 2011

For text: http://online.wsj.com/article/SB10001424052748704364004576131670845358208.html?mod=ITP_pageone_0#

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First published by the National Center for Policy Analysis, United States

FMF Policy Bulletin/ 15 February 2011