Think Inflation in the U.S. Is Bad? Listen Up

By Jack Crooks

Think your gas and grocery bills are bad? They're just a drop in the bucket compared to some other places around the world.

For example, year-over-year consumer prices in Vietnam just surged by a whopping 26.8%. The month-over-month numbers jumped a cool 2.1%. To put that in perspective, 2.1% inflation is what the Federal Reserve considers a comfortable pace for inflation for the entire year.

The biggest problem facing the Vietnamese government is figuring out how to keep rising food and energy prices from derailing their roaring economy. Sound familiar? If so, then you know Vietnam isn't the only country facing this problem - not by a long shot.

In fact, according to my research, there are over 50 different countries around the world battling double-digit rates of inflation. Like Vietnam, most of these countries are emerging markets. And all of them are at risk of transforming from an appealing growth story to an economic disappointment.

In sharp contrast to the Federal Reserve here in the U.S., central banks in key emerging markets around the world are proactively working to counter inflation. You may be surprised to learn how their currencies have responded. Let me explain...

Learning from the Fed's Ignorance

After witnessing how the Fed shredded the dollar's value and slammed stocks by ignoring inflation, emerging market central banks are stepping up to the plate:

• We know that China is already making strides with its currency. Interest rate increases highlight their efforts.
• India's central bank raised its benchmark rate by 50 basis points, to 8.5% with immediate effect. That's its highest rate since March 2002 and the second increase this month. It also signaled that it would act again if needed.
• The State Bank of Vietnam sharply raised its benchmark interest rate to 12% from 8.75%. That's an aggressive effort to curb surging inflation and tighten lending. Commercial banks are now allowed to offer depositors rates of up to 18%.

 

Interest Rates: The Quicker Currency Picker Upper

Will this bias toward tightening monetary policy spark a new emerging market Forex rally? Adjusting monetary policy to fight off inflation should normally support a country's currency. The logic here is that interest rates are going up and the investment appeal rises with it.

Mexico's peso strengthened to a five-year high after the central bank unexpectedly raised its benchmark interest rate a quarter percentage point to 7.75%. The same thing happened in Brazil. Bonds also rose because investors gained confidence that the proactive monetary policy would curb inflation and help preserve the value of debt's fixed payments.

Bottom Line: Monetary policy has been too accommodative and must respond to the growing inflationary environment. The rising prices will require that most emerging market central banks take action. By working to strengthen the currency's value they can hope to ease the strain of crude and food costs.

The line in the sand is quite fine. That's going to make it easy to scrutinize the efforts, or lack thereof, central banks take to counter inflation.

 

Comments

[Reinko]

Lots of countries with a currency peg to the US dollar face double digit inflation for some time now.
And even now lots of them would like to keep the peg in place while commen sense would be to peg it against a basket of currencies.

But if they are too stupid to understand elementary economical reasoning, let the inflation learn them elementary economics!

The peg was stupid in the first place...

[Jim D]

So, Vietnam has a 26% inflation, and they're offering 18% interest?

And that's considered "inflation fighting"? It's not. Not until it's LARGER than the inflation number.

[jozap]

Well, your comments would be good, except that US inflation rate is really in the 14% range.

The items bought by 90% of all households on a daily basis have an even higher inflation rate.

And this is the US, not Vietnam. Compairing apples to oranges doesn't work for me.

[iThinkBig]

Agree with Jozap, going from having 25 years of stellar growth and a fantastic quality of life to bust in a nearly a microsecond is destabilizing beyond belief. Not that it's right or fair, but emerging economies more or less lived this way since times indefinate. Also, this conceited government should be bending over backwards to appease the international community for our global theft. No doubt we'll be raising rates, I am getting tired of these same articles focused on the gnat when we are about to be forced to swallow the camel. So we raise rates to 2.25%? Rates will need to go much higher, think Paul Volker to combat this inflation and correct our nation's dillusion thinking about economics and life in general.

[johndough110]

No I am not a realtor. That's my disclosure. But in times of tremendous inflation wouldn't it be, if you had the cash, a good idea to pick up a couple of rental properties? I mean, as a hedge against inflation over time (plan on keeping it 5-10 years) couldn't it be a wise move assuming you picked a great location and got a stellar deal?

[Jason T]

To the idea of buying rental property now. I can't imagine it's still yet ok when median house price / median household income in the US is still way too high. 2007 it was 4.07. It avaraged about 2.7 in 1980, 1990 and 2000. So, in the aggregate, house prices have much further to fall.

This fall will cripple finance companies who've overlent Americans. Should take a full 3 years before bottoms. Get ready for the next great depression.

[sasoros]

The contribution from Food and Fuel to emerging market inflation indices is far higher than the US. Also they do not have banking crises and credit crunches to deal with. Stop whining, you folks in the US still have a good life you know....

[Augustus]

For johndough,
I pretty much agree with you. How can there be roaring inflation without real estate also going up? The other advantage is the a buyer can still get pretty reasonable financing for a fixed rate for a very long term. The possibility of rising rates will dampen any gains for a bit. But, people have easily paid rates above 8% in the past and we still had a very healthy price rise in Real Estate.

Higher inflation = higher nominal incomes = ability to make larger $$$$ payment for shelter. Pretty good inflation hedge that can be safely financed - just send in the payment and they will leave you alone. Get a 50% LTV mortgage and let it ride.