Inflation Rises in the UK and China—Oh My!

The BBC is reporting this morning the rise in UK inflation:

The UK Consumer Prices Index (CPI) annual inflation rate rose to 4% in January, up from 3.7% in December, as the effects of the VAT rise were felt.

Higher oil prices also meant inflation remained well above the 2% target.

Retail Prices Index (RPI) inflation - which includes mortgage interest payments - rose to 5.1% from 4.8%.

The CPI figure is the highest since November 2008, and will put pressure on the Bank of England to lift interest rates to curb accelerating inflation.

Meanwhile, inflation in China is rising as well. According to Bloomberg:

China’s inflation accelerated in January as prices excluding food rose the most in at least six years, bolstering the case for more interest-rate increases to tame overheating risks in the fastest-growing major economy.

Consumer prices rose 4.9 percent from a year earlier after a 4.6 percent December gain, the statistics bureau said on its websitetoday. A separate central bank report showed banks signed 1.04 trillion yuan ($158 billion) in new loans, less than forecast while still the third-highest January total.

The article further points out that: 

Asian economies, with rising food costs and inflows of capital driving inflation, may need to raiseinterest rates further to limit the risk of overheating and prevent a “hard landing,” International Monetary Fund Managing Director Dominique Strauss-Kahn said Feb. 1. India’s benchmark wholesale- price index rose 8.23 percent in January, Indonesia’s inflation is 7 percent and South Korea’s is 4.1 percent, the latest government data show.

Now, what does this all mean?

It means that food prices are rising—courtesy of the inflation exported by the Federal Reserve, via the various iterations of Quantitative Easing—and now we are all seeing the effects on the world's economies, both developed (like the UK’s) and emerging (like China’s and the rest of Asia’s). And this will likely trigger a rise in interest rates, at a time when the global economy is not exactly feeling at its most confident and carefree. 

Inflation, in and of itself, would be bad, especially in stagnating economies—the dreaded “stagflation”. But what is happening around the world is, rising food prices are setting the stage for social unrest. We have seen that in Egypt, we are seeing it in the rest of the Middle East. We are also seeing it in Asia and to a lesser extent (so far) in Latin America. 

Rising social unrest will have a severe impact on the global economy, by raising the specter of uncertainty—which will only further help drive up prices, especially of commodities, which will basically mean adding fuel to the fire. 

So this isn’t over—far from it. This is merely the first signs of the beginning