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Friday, May 16, 2008

Enlightment on inflation in Europe

As many EU citizens I often look at the price of milk and wonder why it's higher from the last time I bought again. AGAIN! Inflation in Europe is very obvious these days. I live in Bulgaria, but I have also knowledge of Spain's prices and they are up too. There are some articles in EuroActiv mentioning that the prices of food are up in other countries too. So, after the revelation that a Swiss bank has lost 18Billion of euro for this year, because of the collapse of American market (, because obviously many European banks invest in US market and loose big time because of their crisis), here's another one. Houston, it looks like we have a problem.

Inflation is up and it's getting rough. It looks like USA is going to get us all down after all. Because as we know, The European Central Bank will increase the interest rate (? sorry don't know the term in English) to fight inflation (contrary to the Federal Bank in USA that will decrease it to decrease the financial burden on debts) . Which of course will lead to increase of the money people will pay to banks on their credits, thus decreasing their incomes. The prices are going up. Thus decreasing even more the income of people. And now we see that finance chefs urge to not increase the salaries! Because obviously it will lead to inflation.
I think it's high time, someone gets the mic and tell us what's up and how to get trough it. Because if we have to limit our spending if there's a crisis on the horizon, it's good to know this in advance.
Also, below that article, you can see another one on inflation in Asia and the result in USA.

EU finance chiefs urge pay restraint

7 April 2008

As trade union members gathered in their thousands to demand wage rises in the face of rising prices, EU finance ministers warned that excessive pay hikes risked fuelling spiralling inflation.

Although ministers and central bankers from the euro nations expressed their understanding of the actions of protesters in the Slovenian capital of Ljubljana, they insisted that keeping labour costs low would be "absolutely decisive" in keeping inflation under control and defending workers' purchasing power.

"I can understand very well the demands of the unions," said EU Economics and Monetary Affairs Commissioner Joaquín Almunia, speaking after the Eurogroup ministers meeting on 4 April. But he insisted that wage increases "should be based on productivity increases" so as not to drive up inflation.

In March, inflation in the 15 eurozone countries jumped up to 3.5% - the highest level since the introduction of the common currency and well over the bloc's 2% target. Slovenian Finance Minister Andrej Bajuk warned that the problem could be long-lasting. "The changes that we are now seeing seem every day more of a structural nature than just a question of short-term development," he said.

Central bankers believe that raising wages at this point in time could further fuel these inflationary pressures. Recent pay increases for German public sector workers as well as the Belgian system of automatic wage indexation came under fire at the meeting, during which other member states were urged not to implement similar policies.

Referring to the German wage settlement, European Central Bank Governing Council member Axel Weber said: "This deal will lead to significantly higher upwards wage pressure than we have in our forecasts, and we view that with a certain concern."

"It would be an enormous mistake to imitate Germany," added European Central Bank President Jean-Claude Trichet.

But trade unions slammed the calls for moderation. "Top managers earn up to 300 times more than their workers, leaving more than 30 million people on poverty wages," the European Trade Union Confederation (ETUC) said. "We condemn the threats of the politicians, ministers and employers that the wage rise would cause further inflation, while they keep the real reasons to themselves," said Dusan Semolic, head of the Slovenian Trade Union Confederation.

Inflation fears mean the European Central Bank is unlikely to lower its interest rates in the near future, despite the slowdown in economic growth caused by the recent turmoil in global financial markets.

The gloomy economic outlook for 2008 hung over the meeting, where finance ministers agreed to increase cooperation in managing future market crises and to strengthen supervision of the bloc's banking system. source

Asian Inflation Begins to Sting U.S. Shoppers

Justin Mott for The New York Times

Published: April 8, 2008

BAT TRANG, Vietnam — The free ride for American consumers is ending. For two generations, Americans have imported goods produced ever more cheaply from a succession of low-wage countries — first Japan and Korea, then China, and now increasingly places like Vietnam and India.

Iflation in the developing world, especially Asia, is threatening that arrangement, and not just in China, where rising energy and labor costs have already made exports to the United States more expensive, but in the lower-cost alternatives to China, too.

“Inflation is the major threat to Asian countries,” said Jong-Wha Lee, the head of the Asian Development Bank’s office of regional economic integration.

It is also a threat to Western consumers because Asian exporters, even in very poor countries, are passing their rising costs on to customers.

Developing countries have had bouts of inflation before. Indeed, some are famous for them, like Brazil, which experienced triple-digit inflation in the late 1980s and early 1990s. But two things make this time different, and together promise to send prices higher at Wal-Mart and supermarkets alike in the United States, just as the possibility of recession looms.

First, developing countries now produce nearly half of all American imports. Second, inflation in these countries is coming at the same time that many of their currencies are rising against the dollar.

That puts American consumers in a double bind, paying at least some of producers’ higher costs for making their goods, and higher prices on top of that because the dollar buys less in those countries.

Not long ago, it would have been unlikely for a poor country with high inflation to see its money strengthen in value against the mighty dollar. But the dollar is not quite as mighty as it once was. Large American trade deficits and other problems have weakened its appeal.

And there are signs that the dollar could fall further if developing countries’ central banks stopped supporting it, particularly in Asia.

Vietnam’s central bank even had to order the country’s commercial banks late last month to resume buying dollars within the tight range of exchange rates set by the government. Many banks had started betting on dollar depreciation and refusing to accept large sums in dollars, to the point that multinationals and exporters had trouble wiring money into the country to pay their employees’ salaries.

Additionally, the dollar’s weakness is itself a cause of inflation in developing countries, particularly those that have barely let their currencies rise against the dollar in an effort to hold on to export markets.

High costs for construction materials are making it more expensive for the many multinationals like Samsung of South Korea and Hanes and Emerson Electric of the United States that are now building factories in Vietnam, partly in response to rising costs in China.

In addition to the weak dollar, economists say that countries like Vietnam, Egypt, China and Brazil are inherently more vulnerable to inflation when, as now, rising prices are led by increasingly expensive commodities.

Soaring food and energy costs have a far greater effect on developing countries like Vietnam, because of their large agricultural and energy-hungry manufacturing sectors, than on industrialized countries, which tend to have larger service sectors than manufacturing sectors.

Two opposing trends have made it hard to gauge the true extent of inflation in the developing world.

Very heavy investment in new factories, especially in China but increasingly in emerging countries like India and Vietnam as well, has created a lot of extra industrial capacity. That could drag down prices somewhat if the American economic slowdown causes a global slump in demand.source

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