GLOBAL ECONOMY-Inflation surges as commodities prices soar

Wed Jun 11, 2008 7:04am EDT
SINGAPORE, June 11 (Reuters) - Surging raw materials prices pushed Japan's wholesale price inflation to a 27-year high in May and China's factory-gate inflation to its highest in nearly four years, underscoring growing price pressures on the world's economies.
Spain reported annual consumer inflation jumped to a 13-year high of 4.6 percent in May and France said EU-harmonised inflation rose to 3.7 percent, its highest since the data series began in 1997.
"We're still seeing the predominant effect of energy prices and food prices, it's the same story. Inflation will continue to be high in coming months, we haven't reached the peak yet," Olivier Gasnier, an economist at Societe Generale said of the French data.
Rising commodity prices have swung the main focus of global policy makers in recent weeks away from economic growth to the threat of a global spike in inflation.
Although demand is showing signs of weakening in the United States and Europe, voracious appetite for raw materials to feed fast growing emerging economies is fuelling a sharp rise in inflation and increasingly worrying central banks.
Recent comments from the heads of the U.S. Federal Reserve and the European Central Bank have prompted financial markets to price in an increasing risk of higher interest rates in the world's top two trading blocs.
Reflecting China's need for raw materials to keep its economy humming along at double-digit growth, May imports rose at their fastest pace since 2004.
Its exports were also unexpectedly strong thanks to demand from the likes of Brazil and Russia, where shipments rose more than 84 percent and more than 47 percent, respectively, offsetting relatively sluggish demand growth from the United States of 9.1 percent.
Higher raw material costs pushed up China's producer price inflation to 8.2 percent in May, the highest in nearly four years. Food, energy and raw materials costs all surged at double-digit pace.
PIPELINE PRESSURE
The figures suggested price pressures in the pipeline for ordinary Chinese that could limit any moderation in consumer inflation in coming months.
China's trade surplus in May hit $20.2 billion, down 10 percent from a year earlier, after imports soared 40 percent to outpace exports growth of 28.1 percent.
The evidence that the surplus is cresting will offer some relief to Chinese policy makers who will hold high-level talks with their counterparts in the United States next week.
But the surplus is not shrinking quickly enough to relieve the central bank's headache of cash flooding into the country from exports, one of the root causes of inflation.
"If export growth holds up and the trade surplus remains at these elevated levels, forex reserve accumulation continues," said Dwyfor Evans, an economist at State Street in Hong Kong.
China's foreign exchange reserves, already the world's largest, grew a record $74.5 billion in April, adding to the vast pool of liquidity that threatens to push prices still higher.
The central bank signalled its concern on Saturday with an aggressive 1 percentage point increase in banks' reserve requirements to sop up some of the surplus cash in the economy.
That rise, which ties up deposits that banks could otherwise lend out, was interpreted as a harsh tightening step by investors and triggered a steep fall in China's stock markets.
The country's benchmark index .SSEC briefly dipped below the psychologically important level of 3,000 on Wednesday but pared losses to close 1.6 percent lower at 3,024. It's down more than 40 percent so far this year.