Emerging market inflation has eased across the board, in line with tightened monetary conditions in 2011 and weak consumer spending.
China has showed the strongest trend of price cooling, with consumer inflation easing to 4.2% year-on-year in November 2011 (closer to the 4% informal target), from a peak of 6.5% in August. Brazil’s inflation fell to 6.5% in December from a high of 7.3% three months earlier, while India’s easing has been marginal, falling to 9.1% in November from 9.72% in October and a high of 10% in September.
Tight monetary conditions as well as falling commodity prices have contributed to the slowdown in consumer prices. Food prices in December 2011 showed a cumulative fall of almost 10% from their historic February peak, while Oil prices fell 13% from their April high of US$ 123 per barrel.
Some Monetary Easing in Favour of Growth
In favour of growth, both China and Brazil started easing monetary policy in the last quarter of 2011, with Brazil marginally reducing the monetary policy rate while China cut Reserve Requirements for large banks in November by 50 bps. The case for easing in Brazil became evident as Retail sales grew by a meek 4% y/y in October 2011 from buoyant growth of 10% y/y in April. In India, Industrial Production of Consumer goods contracted almost 1% y/y in October 2011, from a high of 13% in February.
Monetary aggregates are starting to show some up-tick as a result of the easing in monetary conditions. In China, the Broad Money Supply grew by 13.6% y/y in December 2011 from 12.7% in November, while in Brazil the number grew by 16.3% y/y in November from 14.9% in September.
Inflation to stay low in 2012
Price forecasts for emerging markets reflect further easing on the back of weak growth and commodity prices, as well as firmer exchange rates. In Brazil, expectations are for inflation of just over 5% in 2012, while Chinese prices are expected to rise by 4.5%. We expect further monetary easing under these conditions in order to support growth.
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