Monday, May 5th, 2008
China Officials: Inflation Too Hot, Rates May Rise
By Mike Caggeso
Associate Editor
Chinese officials signaled they might raise interest rates to curb the inflation epidemic sweeping across the growing superpower.
"We will combat demand and prevent rapid economic growth from turning into overheating," Vice Finance Minister Li Yong said at the Asian Development Bank’s annual meeting, Bloomberg reported.
Yong said the government would tighten monetary policy - reducing money supplies, investment ratios and more to meet its inflation target of 4.8% this year. Yong has his hands full because consumer prices surged 8% in the first quarter.
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In addition, Yong said the government would increase its investments in the agricultural sector by 20% this year, Reuters reported.
Not Just China
China certainly isn’t alone with its inflation problem. Jean-Claude Trichet, president of the European Central Bank, said all countries were affected by significant inflation risks caused by the still rising prices of food, energy and other commodities.
"Food prices (are) one of the issues we mentioned constantly," Trichet told Reuters. "It is an additional element adding to the energy prices, to the metal prices and a number of commodity prices and that is really at a global level a very important phenomenon."
This isn’t just a consumer problem. Investors - especially those who have invested in the soaring Asian indices - are seeing inflation nipping away at their holdings.
Last week, JPMorgan Chase & Co. (JPM) reduced its 2008 forecast for several major Asian indices by double-digit percentages.
"Investors’ focus needs to move to increasing policy risk as governments manage a poorer growth-inflation balance," its report said. "The downside risk is that higher inflation reduces domestic demand and investment, as disposable income and profit margins are squeezed."
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