Tracking The World Economy...-30/07/2010

The Great Divide In Price Pressure In Developed And Developing Countries

Rapid economic expansion in Asia and the emerging economies is driving up consumer prices and asset price inflation in China, India, Hong Kong and Singapore, to name a few. This is likely to have been made worse by inflow of capital from the developed countries, which may further fuel inflationary pressure in these countries. By keeping US interest rates ultra-low for more than a year, the US Fed could be feeding bubbles in emerging markets by inducing global investors to move money out of the US and into countries that offer higher yields. As it stands, India’s inflation rate, as measured by the wholesale price index, has been hovering at a high level of 10-11% for the last five consecutive months. Although Chinese consumer prices only rose by 2.9% yoy in June, its property prices have been accelerating before credit tightening measures implemented by the authorities helped to cool it down. The same also happened in Singapore and Hong Kong. In Malaysia, although consumer prices rose by just 1.7% yoy in June, anecdotal evidences suggest that property prices in certain locations have also risen significantly in the last 12 months. Policymakers in these countries have been trying to cool things down. China has introduced a series of administrative measures to cool its property market. India and Malaysia have been raising interest rates in a move to normalise their monetary conditions. This suggests that economic activities in these countries, which have helped to lead the global economic recovery from its worst recession since the post-World War II, are likely to slow down. Over tightening in these
countries, however, could be a risk to the global economic recovery.

Tracking The World Economy...-30/07/2010