Global Economic Outlook and Strategy - Kadin Indonesia

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February 28, 2008 Global Economic Outlook and Strategy Figure 37. Headline Consumer Price Inflation in Emerging Markets (Sequential Three-Month Seasonally Adjusted Percent Change), Jun 03-Jan 08 4.0% 4.0% 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Asia ex China China CEEMEA Latin America 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 Figure 38. Core Consumer Price Inflation in Emerging Markets (Sequential Three-Month Seasonally Adjusted Percent Change), Jun 03-Jan 08 9% 9 9% 9 8 8 7 7 6 6 5 5 4 4 3 3 2 2 1 1 0 0 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Asia Latin America CEEMEA Note: GDP weighted. Asia — Hong Kong, Indonesia, Korea, Philippines, Singapore, Taiwan, Thailand. CEEMEA — Czech Republic, Hungary, Poland, Slovakia, Turkey, Israel, South Africa. Latin America — Argentina, Brazil, Chile, Mexico, Peru, Venezuela. Sources: Haver and Citi. Note: Core inflation is defined as 20% trimmed in Asia and by respective government national statistics offices in CEEMEA and Latin America. GDP weighted. Asia — Hong Kong, Indonesia, Korea, Philippines, Singapore, Taiwan, Thailand. CEEMEA — Czech Republic, Hungary, Poland, Slovakia, Turkey, Israel, South Africa. Latin America — Argentina, Brazil, Chile, Mexico, Peru, Venezuela. Sources: Haver Analytics and Citi. for meat in China and India. Spending a lower share of income does not preclude an absolute rise in food demand, but it does lower the increase in that demand relative to income growth, giving supply adjustments a better chance of keeping pace. Low food inventories are exacerbating price movements. Food price inflation probably is complicating monetary policy in the short run. Other measures to stabilize food prices are widespread but could prove destabilizing in the future. Third, the rise in food prices is in part a reflection of the low levels of stocks that translate demand surges more directly into price increases and increase the volatility of prices. In the United States, for example, wheat stocks are at their lowest levels since the 1930s. But price increases that stem from demand shocks and low inventories should, over time, lead to substitution to cheaper foods and/or innovations that improve yields and thereby supply. While food price inflation is, in our view, likely to moderate, its current elevated level constrains the scope of some central banks to use countercyclical monetary policy in the face of weakening external demand. Food price inflation threatens the credibility of inflation targets, forcing inflation-targeting central banks to take a more hawkish stance, as has been the case in Slovakia, Turkey, and Brazil. Elsewhere, rising food prices can feed into inflation expectations, forcing central banks into a tighter stance. However, the yield curves of most countries do not reflect large changes in steepness that would be consistent with higher expected future inflation. Besides constraining monetary policy, high food prices have engendered a spate of market interventions in a variety of countries — price controls, export bans, tax increases, import tariff cuts — designed to shelter domestic consumers. Such interventions have been especially prominent in China, India, Vietnam, Indonesia, Argentina, and Mexico. While designed to lessen the social disruption and unrest that higher food prices can foster, the export bans and price controls either shift burdens to trading partners or risk shortages. Prominent price controls also risk future spikes in inflation if ensuing shortages become unmanageable. 32
February 28, 2008 Global Economic Outlook and Strategy Even if stagflation subsides, the long-term trend for the relative price of food to rise looks intact. Higher food prices could moderate the pressure for urbanization by lifting rural incomes. While the risk of food price inflation appears set to ease over the course of this year in the face of weaker aggregate demand and more stable energy prices, the long-term trend for food prices to increase relative to manufactured products looks robust. As mentioned, the increased demand for food as a source of energy will tend to inflate grain and oil seeds. Meanwhile, the average level of manufacturing productivity remains low in emerging markets relative to the G7. Relocating manufacturing production to emerging markets and raising productivity there can generate higher profits or lower selling prices. Finally, a relatively higher price for commodities, especially food, could diminish some of the pressure for urbanization and the associated stress on emerging market cities. Higher food prices would tend to boost rural incomes relative to urban wages, lessening the attractiveness of migrating to cities. 33
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Global Economic Outlook and Strategy - Kadin Indonesia

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