Inflation. Global inflation eased substantially during the second half of 2011 and into 2012.

Transcription

1 Inflation Global inflation eased substantially during the second half of 11 and into 1. Developing country inflation, which averaged 7. percent in 11 eased to a percent annualized rate in the three months through April 1 (saar). Among high-income countries inflation decelerated as well but by much less, from.7 to. percent in the same period. For emerging markets the decline in inflation mainly reflected a sharp falloff in local food inflation, relative stabilization of oil prices, a weakening in the pace of global growth and general firming of EM currencies (figure INF.1). A decline in local food price inflation was the main driver of lower inflation in most developing economies. Local food prices in developing countries increased.9 percent in 11, reflecting drought conditions in several developing regions the year before (notably in Europe and Central Asia and the Horn of Africa) and a sharp percent rise increase in the dollar price of international food commodities. Domestic food price inflation decelerated in South Asia, while in Europe and Central Asia consumer food prices have recently declined on the back of improved crops following drought in. In contrast, food price inflation has accelerated in sharply in the Middle East and North Africa, less so in Sub- Saharan Africa and Latin America and the Caribbean (table INF.1). Despite the welcome normalization of developing country food price inflation, coming to stand at. percent over the three months through February 1, food prices in developing countries stand some percent higher (relative to non-food consumer prices) than they were at the beginning of. This is a very large hit to real incomes especially among poor urban families where food often represents more-than one-half of their total expenditures. Local food price increases in developing countries (and local food price inflation) was much lower than the dollar price of internationally-trade commodities, in part because of exchange rate effects (appreciation of most developing country exchange rates see exchange rate annex for more), but mainly because most food consumed in developing countries is produced locally, and therefore the pass-through of international prices to local prices is weak ranging between.1 and.3 percent (World Bank and figure INF.). Figure INF.1 Inflation in developing countries has stabilized due in part to food prices Developing countries, total and food inflation (3m/3m saar) 1 1 Figure INF. Pass-through of international food prices to local food prices is small price indexes, percentage change, year-on-year Developing Total CPI Developing Food CPI Source: World Bank and U.N. Food and Agricultural Organization Local Food CPI International Food Developing CPI Source: World Bank, ILO. 7

2 Regional inflation trends differ considerably While the influence of weaker food price inflation has played an important role in many developing countries, regional (and country) developments reflect a much wider range of influences. Headline inflation in the East Asia and Pacific region decelerated from a peak of percent at end- to an impressive 1. percent by April 1 (3m/3m saar). Most of the regional decline has been driven by a dramatic falloff in Chinese inflation (figure INF.3) reflecting among other things, food price declines (though subject to extremes of variability at times of National Holidays and the New Year); an easing in residential rentaland home purchase prices following new regulations and prudential guidance, and more broadly, the policy of maintaining a modest rate of appreciation of the yuan vis-à-vis the dollar, averaging about percent per annum, serving to pressure international prices lower in domestic terms. ASEAN- countries as a group have seen prices ease from a percent pace to 3. percent during the first quarter of 1 on this measure, on increased stability in food prices and generalized exchange rate appreciation. An exception is Indonesia, where strong domestic growth is exerting demand-pull pressures on headline inflation. Table INF.1 Headline inflation and domestic food prices by world region 9 11 Q1-11 Q3-11 Latest 1 Headline Consumer Prices Annual percentage change Annualized percentage change saar World High income countries Developing countries East Asia and Pacific EAP excluding China Europe and Central Asia Latin America LAC excluding Argentina Middle East and N. Africa South Asia SAS excluding India Sub-Saharan Africa SSA excluding South Africa Memo item: Developing excluding China Domestic Food Prices Annual percentage change Annualized percentage change saar World High income countries Developing countries East Asia and Pacific Europe and Central Asia Latin America Middle East and N. Africa South Asia Sub-Saharan Africa Memo: Internationally traded commodity prices Annual percentage change Annual percentage change (yr-on-yr) Energy Crude Oil (World Bank Average Food Grains Source: World Bank, International Labor Organization.

3 Figure INF.3 Dramatic falloff in China's consumer prices drives East Asia Figure INF. Sharp turnaround in Russia and Turkey begin to carry Europe & Central Asia inflation to more moderate rates ECA Russia Turkey East Asia EAP x China China - Figure INF. Latin America affected by complementary developments in Brazil and Mexico 9 Figure INF. Egypt and other oil importers in Middle East & North Africa see rising price pressures in contrast with oil exporters Oil exporters Egypt Other oil importers 3 Latin America Brazil Mexico - M1 M M9 11M1 11M 11M9 1M The decline in inflation in Europe and Central Asia to 3.1 percent reflects a significant reversal in food price inflation in Russia, the Ukraine and several countries of Central Asia as following the drought of, crops were much stronger this year. Inflation in the Russian Federation has eased to an annualized rate of. percent as of the first quarter of 1. In Turkey inflation also slowed, but strong domestic demand and persistent capacity constraints mean inflation remains just below 7 percent (figure INF.). Latin America s inflation had been elevated, reflecting diverging trends across countries within the region. Inflation in Brazil eased significantly in line with weaker growth and the policy tightening of 11. And in Mexico it had picked up, reflecting a spate of volatile food prices. Price changes in Mexico have now softened to. percent as of April, and expectations for inflation appear to be moderate. Recorded inflation in Argentina has decelerated modestly in recent months but with prices rising at a 9. percent annualized pace, inflation poses a potentially serious problem all the more so if suggestions that recorded inflation is underestimating actual price developments by a significant degree are correct (figure INF.). 9

4 In the Middle East and North Africa the disruptions of the transition in Arab countries continue to drive economic and price developments. Developing oil exporters of the region have seen headline inflation rise on the back of increased budgetary outlays in support of social- and infrastructure programs. And In the case of Iran, a wholesale revision of subsidies and prices was recently implemented affecting outturns there (figure INF.). Oil exporter s CPI has since dissipated to a degree, but remains elevated at 3 percent (saar) at latest readings. Oil importing countries (here classifying Egypt as a non-oil dominant economy) have seen consumer price changes accelerate on the back of higher oil prices, substantial yearon-year increases in local food prices, plus the effects of subsidies. Uncertainty continues for the region with many political economy decisions facing authorities in coming months, importantly including questions on subsidies. South Asian inflation has declined significantly grounded in improvements in India. At the start of, inflation in South Asia was 1 percent (saar); as of March 1 that rate had halved to 9 percent. The bulk of the improvement is tied to lower food prices, easing economic activity, and price controls that have limited the pass-through of higher energy prices in India (figure INF.7). Outside of India, however, other South Asian inflation Figure INF.7 A recent rebound in South Asian headline inflation South Asia India Other South Asia (notably in Pakistan) is ranging within a 1 percent band. An upturn in Indian inflation in March and April reflects strong wage growth. In Sub-Saharan Africa, South Africa has witnessed a receding of inflation pressures to percent as of April 1, and for the region excluding South Africa 1. percent, in the latter tied to poor weather and high food prices (figure INF.). But an important differential has emerged between oil exporters and oil importers. The former group is using available hydrocarbon resources to boost investment and government outlays, helping to underpin stronger rates of domestic demand (examples include Ghana and Sierra Leone both new to the oil market, and Nigeria). CPI for Sub-Saharan Africa oil exporters ramped up from. at mid-year 11 to 17 percent by early 1 (saar). At the same time inflation for oil importers has been softening, as oil prices in this period were fairly subdued: inflation moved from to 7. percent over the same period. With data timeliness problems for many Sub-Saharan African countries, it is likely that oil importers will show some pick-up in inflation, exporters- some softening as further data becomes available for analysis. Figure INF. Coming to convergence at higher CPI rates in Sub-Saharan Africa M1 M M7 M 11M1 11M 11M7 11M 1M1 1M Sub-Saharan Africa South Africa SSA x South Africa

5 Despite the generalized decline in inflation, several countries continue to face high-or accelerating inflation Several countries are continuing to be affected by high or accelerating inflation, and this for a number of reasons. Some economies continue to operate at or above potential GDP raising concerns of overheating due to demand pressures and creating an environment where suppliers find it easier to raise prices, for example in Argentina, Brazil, Ghana (new oil), India and Turkey. In contrast with developing countries, high income countries in aggregate witnessed a slight increase in headline consumer price inflation Consumer prices increased from 1.9 percent in September 11 to. percent by April (saar), with a notable characteristic that deflation that has characterized the Japanese economy since has ended (figure INF.9). Several factors have contributed to these overall developments, including the large liquidity injections of highincome central banks in response to the crisis. The depreciation of the euro during the recent spite of financial weakness in the euro zone has either augmented the upward movement of traded commodity prices, or yielded higher landed prices in local currency terms for a given dollar price. In the United States, in addition to Figure INF.9 High-income inflation converging toward a.% rate (saar) High Income United States Euro Area Japan the series of liquidity injections to the economy, higher landed crude oil prices have moved quickly to the petrol pump, raising consumer prices, but also underpinning substitution to alternate means of transport, and purchase of more fuel efficient vehicles. Inflation based on fundamental domestic factors is not a particular worry at the current interval with economic activity on the weaker side. Core consumer prices (adjusted to remove the prices of food and fuel) have increased moderately over the past 1 months (year-on year basis) in each of the United States, Japan and the Euro Area. The biggest acceleration in core CPI has been in the United States, moving from 1.3 percent to.3 percent over the year to March 1, as very gradual pass-through of higher imported raw materials costs, a pickup in wage rates in selected overseas suppliers to the United States, and spillovers from increasing prices of domestic services have likely served to underpin this development. Looking forward, inflation is likely to encounter opposing forces over 1 to 1. The view for inflation moving into the projection period is linked to the progress with which (for the large part developing-) countries first converge toward potential output growth by 13. And thereafter, given expected more favorable developments in the external environment to grow at or about the pace of potential GDP. This would imply a modest reacceleration in inflation and inflation expectations for developing countries, and eventually for the United States and Europe, to carry global inflation back to modest gains in a range of to. percent. On the downside, domestic demand could be lackluster, mitigating chances of demand pull elements of inflation. The view for commodity prices is for decline or small positive changes in these years, meaning that base effects of high international prices will fall out of calculation for headline inflation. In contrast, the potential for faster growth in the United States-; for 11

6 headwinds from the oil markets-; and for a new flight to quality once the intensity of the global crisis subsides are real risks to the upside for inflation. References El-Arian, Mohammed. Danger of Emerging Market Inflation. Financial Times. London. May 31, 11. Loungani Prakash, and Philip Swagel. Sources of Inflation in Developing Countries. IMF Working Paper WP/1/19. International Monetary Fund. Washington DC. December 1. Oxford Analytica, various issues World Bank. a and b. Global Economic Prospects, (a) January and (b) June. World Bank. c. Transmission of Global Food Prices to Domestic Prices in Developing Countries: why it matters, how it works and how it should be enhanced. Note to G-, Commodity markets sub-working Group. April 1. 1