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China Food-Price Gains May Force Choice Between Inflation, Jobs

Food-Price Gains Defy Easing Global Inflation
Vegetables and prices are displayed as a vendor waits for customers at a market in Beijing. Photographer: Adam Dean/Bloomberg

Rising food prices that defy easing global inflation may challenge policy makers in countries including China to control costs without hurting economic growth, panelists at a forum said yesterday.

A growing middle class seeking higher-protein foods is contributing to increased demand and prices, Abby Joseph Cohen, partner and senior U.S. investment strategist at Goldman Sachs Group Inc., said at the Bloomberg Global Inflation Conference in New York hosted by Bloomberg Link.

Central banks “should be concerned” about rising food prices, said Roberto Rigobon, a Massachusetts Institute of Technology professor, while James Rickards, senior managing director of Tangent Capital Partners, said China risks harming employment if the country tries too hard to contain prices. Their comments compare with signals yesterday from the Federal Reserve and the European Central Bank that the inflation outlook is benign enough to allow further easing.

China is “between a rock and a hard place, because they’re very concerned about inflation,” Rickards said during a panel discussion. At the same time, raising interest rates too much may hurt export-related jobs important to the country’s economy. “Inflation and unemployment are both highly destabilizing” for China, he said.

Inflation remains a major concern of central bankers in Asia’s emerging markets, while policy makers in developed nations are focused on a slowdown in growth. Chinese inflation accelerated to a three-year high of 6.5 percent in July, prompting Premier Wen Jiabao to say Aug. 31 that his top economic priority is stabilizing prices. The rate slowed to 6.2 percent in August, the National Bureau of Statistics said in Beijing today.

Moderate Inflation Forecast

At the same time, slowing global economic growth is restraining increases in the costs of energy and other commodities, which surged earlier this year. The worldwide inflation rate is forecast to moderate on an annual basis to just above 3 percent by the end of this year, from 3.7 percent in June, when most central bank targets were breached, according to economists at JPMorgan Chase & Co.

The United Nations’ Food and Agriculture World Food Price Index has fallen 2.8 percent from a record in February while remaining 21 percent above its level from a year ago. Soybeans, the second-largest U.S. crop behind corn, are trading close to the highest since 2008.

“Even as energy commodity prices have come lower in recent months, things like soybean prices remain at fairly high levels,” Cohen said during a panel discussion on the global inflation outlook. “We may in fact have already begun a structural rise in food prices.”

Option for Action

Fed Chairman Ben S. Bernanke signaled yesterday that he may add more monetary stimulus this month, while ECB President Jean-Claude Trichet said threats to the euro region have worsened and inflation risks have eased, giving officials the option to take further action should the debt crisis intensify.

Trichet said at a press conference in Frankfurt yesterday that the economy faces “particularly high uncertainty and intensified downside risks.” The ECB left its benchmark interest rate at 1.5 percent.

Laurence H. Meyer, a former Fed governor, said at the Bloomberg Link conference that the increased threat of recession means the central bank should shift from a focus on inflation to creating an environment supportive of more jobs. Governments in China and Brazil have criticized Fed stimulus as weakening the dollar and fueling inflation.

Not all conference participants shared Cohen’s view. Food prices will decline over the long term as crop yields increase, said Jennifer Fan, a partner and senior portfolio manager at Arrowhawk Capital Partners. “But volatility will continue to be very high,” Fan said yesterday during a panel discussion.

Volatile Prices

Lincoln Ellis, managing director at the Linn Group and chief investment officer at Strategic Financial Group, said food prices will continue to be volatile, partly because of central bank monetary policies and growing wages in developing countries.

“The dynamics for what we consider traditional inflation are very much in place” in developing countries, Ellis said on a panel.

Bernard Yeung, dean of the National University of Singapore’s Business School and also a panelist yesterday, said China has been “a source of absorbing inflationary pressures” that helped support global growth. Yeung said he doubts the nation will be able to continue to do so and provide investment-driven growth in coming months.

China’s central bank raised interest rates five times and ordered lenders to set aside more cash deposits as reserves 12 times since the start of 2010 to contain inflation.

Low-cost Goods

Rising inflation in China may eventually affect the standard of living in the U.S., because China has been a source of low-cost goods being bought by American consumers, said Jerry Webman, chief economist at OppenheimerFunds Inc. in New York.

“This kind of free ride that we’ve had” will begin to weaken as price gains in China are passed through to products imported into the U.S., Webman said at the Bloomberg Link conference.

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