Emerging Markets See Lowflation

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Emerging Markets See Lowflation

Emerging Markets See Lowflation for First Time in Fed Rate Cycle?

Yet this time, the same dynamic that’s making Fed policy “normalization” a drawn out and gradual affair — stubbornly low increases in consumer prices — is also affecting emerging markets, which more typically find themselves battling to keep inflation low. Part of that is a subdued price of commodities, which are often priced in dollars and can stoke prices in poorer countries when their currencies slide, as has happened during past Fed tightening.

Consider:

India’s consumer prices are rising at the slowest pace since 1999.

Brazil’s inflation rate has also tumbled to the lowest since 1999.

South Korea’s inflation has trended so much lower in recent years the central bank cut its inflation target .

Peru, which had hyperinflation in excess of 1,000 percent at one point in the 1980s, saw prices rise just 2.9 percent last month.

The pattern has widened the gap between real central bank policy rates in emerging markets — which are adjusted for inflation — and those in the biggest developed nations to almost 4 percentage points as of June, according to the Oxford Economics research group. That’s up from less than 1.5 percentage point when the taper tantrum began in May 2013. Full Story

Deflationary forces continue to gather momentum. Here is a novel idea; deflationary and inflationary forces can coexist, but nobody is talking about this. We spoke of this concept several years ago and were ridiculed for it.  Prices are dropping in areas that don’t matter that much but are used extensively by the Fed to determine if inflation is an issue.  On the other hand costs such as rents, housing prices, education and medical costs continue to rise.  A perfect setup for the Fed; they can print as much money as they want and then use deflationary factors to justify their actions.

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