No easing of the inflation plaguing emerging markets

By Karin Strohecker

LONDON (Reuters) – Inflation is a tax on the poor, it is said that this may be why central banks in developing countries have now taken action against price pressures caused by soaring prices for oil, food and other goods.

Unlike the US Federal Reserve, which has hitherto dismissed inflation as temporary, decision-makers in emerging markets cannot afford this luxury of waiting. Many started interest rate cycles before their economies recovered from the devastation of the pandemic.

It is still unclear how firm the inflationary pressures are, said Sergey Dergachev, fund manager at Union Investments.

“We don’t know yet … is it mainly driven by strong popular demand, particularly in developed countries, when they open their economies, or will it be because of supply chain disruptions or a perfect storm of both.”

Below you will find four graphs on the inflation dynamics of the emerging markets:

1 / NO CURRENCY PILLOW

Commodity price increases generally occur against the backdrop of a weaker dollar. This enables the currencies of the emerging countries to strengthen and cushions the price effects of imported raw materials and other goods.

Not this time: Commodity prices have doubled from their April 2020 lows, but emerging market currencies have not kept pace.

Dirk Willer, Head of Emerging Markets Strategy at Citi, said that while this factor generally limits the inflationary impact, “this time around there is a much smaller than normal buffer from the strength of the EM currency.”

(Graphic: EM FX and raw materials: https://fingfx.thomsonreuters.com/gfx/mkt/jznvnrmogvl/EM%20FX%20and%20commodities.PNG)

2 / THE CHINA LOOP

Markets are awakening to rising inflation at the factory gate in China.

The translation from PPI to CPI is not a straight line, but there is no doubt that the global inflation loop is exacerbated by Chinese manufacturers passing higher raw material and component costs on to overseas customers.

“China is still central to global inflation dynamics, but this time the country is importing inflation from the world economy and is now under orders to re-export that inflation overseas in rising industrial export prices that are now in demand in developed countries.” Markets, “said Larry Brainard, chief emerging economist at TS Lombard.

The story goes on

(Graphic: China PPI: https://fingfx.thomsonreuters.com/gfx/mkt/oakpekywkpr/China%20PPI.PNG)

3 / RAW MATERIAL SUPER CYCLE

For some saviors, for others a harbinger of inflation: The synchronized upswing in raw material and energy prices brings relief to oil producers such as Russia and copper producers such as Chile, but also pain for importers such as India and Turkey.

“The inflationary pressures that are now emanating from commodity prices are obviously surprising everyone,” said Saad Siddiqui, strategist at JPMorgan, adding that these are the first commodity markets since 2008 to be synchronized.

“There’s also a big global liquidity argument that the same money that got tech stocks or cryptocurrencies soaring is now fueling commodity speculation.”

(Graphic: Raw materials enjoy 12 months of profit: https://fingfx.thomsonreuters.com/gfx/mkt/ygdpzoeomvw/Commodities%20enjoy%2012%20months%20of%20gains.PNG)

4 / THE FOOD FACTOR

Global food prices rose for the eleventh month in a row in April, hitting a nearly seven-year high, according to an index from the United Nations Food Administration. Sugar prices rose around 60% yoy and grain 26% as the economic reopening boosted demand.

Plant producers from the US to Brazil are experiencing difficult growing conditions that put pressure on policymakers, especially in countries where food is a large part of the inflation basket.

“Emerging markets are facing existential problems that won’t go away after a year of adjustment,” said Simon Quijano-Evans, chief economist at Gemcorp Capital.

(Graphic: Food dominates the inflation baskets of the emerging countries: https://graphics.reuters.com/EMERGING-MARKETS/INFLATION/yxmpjmxyovr/chart.png)

(Reporting by Karin Strohecker, additional reporting by Marc Jones; editing by Nick Zieminski)

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