China-to-India Price Jump Risks Growth as World Outlook Dims
Higher food costs from China to India are raising prices for a third of the world’s people, adding to the challenge of sustaining the global economic recovery as the growth outlook dims.
Consumer prices in China rose 3.1 percent last month as food costs advanced the most since May 2012, statistics bureau figures showed today in Beijing, while India’s Commerce Ministry said inflation unexpectedly accelerated to a seven-month high. Both gauges increased more than economists had estimated.
“In both countries, in recent months, food seems to be the primary driver of the increase in inflation,” said Robert Prior-Wandesforde, a Singapore-based economist at Credit Suisse Group AG, who added that it’s “not the ideal combination” when prices accelerate as growth slows. “It complicates the life of the policy makers.”
The reports signal threats to growth in two of Asia’s three biggest economies as a partial shutdown of the U.S. government risks leading to a default that would roil financial markets and cause recession. The International Monetary Fund cut its global growth outlook last week as capital outflows further weaken emerging markets.
While China’s central bank faces less pressure to raise borrowing costs, last month Reserve Bank of India Governor Raghuram Rajan increased the benchmark repurchase rate to 7.5 percent to stem price gains.
India’s import costs have jumped as the rupee fell 14 percent over the past year against the dollar, compared with a 2.5 percent gain for China’s yuan in that time. China’s yuan strengthened to a 20-year high after prices jumped and the central bank set the currency’s reference rate at a record.
“For India’s case, growth is more worrying,” said Edward Lee, regional head of research at Standard Chartered Plc in Singapore. The RBI is focused on bringing down prices, while moderating growth in China will help to curb demand inflation, he said.
The rupee weakened 0.3 percent to 61.2350 as of 2:45 p.m. in Mumbai, the most among Asia’s most widely traded currencies, while the yuan gained 0.1 percent.
China’s economy probably expanded 7.8 percent in the three months through September from a year earlier, according to a Bloomberg survey, up from the second quarter’s 7.5 percent pace. Overseas shipments dropped 0.3 percent in September from a year earlier, customs data showed on Oct. 12, trailing all 46 estimates in a Bloomberg News survey, while imports rose a more-than-forecast 7.4 percent.
“A big risk for China now is that the government has to scale back its domestic pro-growth policies while external demand fails to grow to make up the gap,” said Xu Gao, chief economist with Everbright Securities Co. in Beijing, who previously worked at the World Bank. “If that happens, it will result in very weak growth starting next year.”
The increase in China’s consumer-price index compares with the 2.8 percent median estimate of 44 economists in a Bloomberg survey, after a 2.6 percent gain in August. The government is targeting 3.5 percent consumer inflation for the year.
“As the inflationary pressure has picked up, the central bank is unlikely to change the tightening bias” in monetary policy for the rest of the year, Liu Li-Gang, chief Greater China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong, said in a note today.
The pickup in September’s CPI was driven by eggs, vegetables, fruits and pork, as well as non-food items including fuel and tourism, according to a statistics bureau statement citing statistician Yu Qiumei. Non-food prices rose 1.6 percent in September, below a 2 percent pace for a 20th month.
India’s wholesale-price index rose 6.46 percent from a year earlier, compared with a 6.1 percent advance in August, the Commerce Ministry said in New Delhi today. The median of 33 estimates in a Bloomberg News survey was for a 6 percent climb.
Food prices climbed 18.4 percent in September from a year earlier, with onions costing four times more than they did a year ago, today’s report showed. Fuel and power prices rose more than 10 percent.
“This inflation reading further strengthens the case for a hike in the repurchase rate,” said Prasanna Ananthasubramanian, an economist at ICICI Securities Primary Dealership Ltd. in Mumbai. The RBI is likely to raise the benchmark another 50 basis points by the end of this year.
The economy will expand 5 percent to 5.5 percent in the fiscal year ending March, the Finance Ministry forecasts. HSBC Holdings Plc predicts slower growth of 4 percent in that period, which would be the weakest in more than a decade.
The expansion in Asia’s third-largest economy is “somewhere near the low,” Rajan, a former International Monetary Fund chief economist, said in a speech in Washington on Oct. 10. The pace should accelerate, helped by exports and farm output, he said.
Consumer prices rose 9.84 percent in September from a year earlier, compared with 9.52 percent in August, a government report showed today. That’s the second highest in the Group of 20 major economies, according to data compiled by Bloomberg.
“Given the RBI’s hawkish stance despite slowing growth, we expect the repurchase rate to remain high for now,” Tirthankar Patnaik, a strategist at Religare Capital Markets Ltd. in Mumbai, said before today’s report. “Rajan is aiming at getting inflation under control, which is needed for ensuring sustained long-term growth.”