by Xu Duo
BEIJING, June 28 (Xinhua) -- If we pick up four keywords to summarize the world's economic situation in the first half of 2011, inflation, QE2, debts and earthquake would probably be the best choices.
EMERGING MARKETS: INFLATION
While it is easy to get thrilled by the very welcome growth rate of emerging markets, especially some Asian and Latin American nations, investors in those countries may be facing a riskier landscape as a result of inflation.
The question is whether central banks and governments in many emerging markets could manage to stamp out inflation fires fueled by a combination of rising commodity prices around the globe and domestic economies operating at a full tilt and thus keep the fast growing economy on track.
In many emerging-market nations, inflation is already running above the top of official target ranges.
The consumer inflation in China, the world's No. 2 economy, hit a 34-month high of 5.5 percent in the year to May, even as the government has stepped up its efforts to tame rising prices.
Brazil has recorded an annual 6.55-percent price increase in May, well above the central bank's target range and reaching the fastest pace since 2005.
Another two of the so-called BRICS economies -- India and Russia -- are suffering even higher inflation rates. India's wholesale price index rose by an annual rate of 9.06 percent in May, while Russia's consumer prices rose 9.6 percent during the same period.
To quell the rising inflation, central banks and governments in the emerging markets have tightened policies at a fast pace.
So far this year, the Chinese central bank has raised the reserve requirement rate for six times and hiked the benchmark interest rate twice. India's central bank has increased interest rates for 10 times since March. The Brazilian government is also trying to prevent Latin America's biggest economy from overheating by reducing spending, increasing borrowing costs and implementing tighter liquidity requirements for banks to curb consumer lending growth.
Those actions have begun to bear fruit. Brazil's inflation eased in May as consumer prices rose at their slowest pace in eight months.
But economists are not so optimistic. They believe the May figures were influenced by seasonal factors. Flavio Serrano, senior economist at Espirito Santo Investment Bank in Sao Paulo, said the "breakdown" was not as good as the headline rate. "We believe we are likely to see a strong deceleration in June, but we do not see a strong change in terms of core inflation." The market median forecast of Brazil's inflation is still above 7 percent in 2011.
The other worry is that inflation and attempts to trim it will destabilize the fast growing economies and overheated emerging-market countries may go from boom to bust, dragging the world economy down with it.
Many investors point to the tricky topic of how China will deal with inflation as the biggest cloud on the horizon. Some warn if authorities want to shift the responsibility of economic growth from government to consumers, wages need to rise faster than the economy, which could be a big issue for China to struggle with in the medium term.
However, there are also some experts who believe investor concerns about inflation in China could well be overdone.
Raymond Ma, portfolio manager of Fidelity China Consumer Fund, said one of the key differences between inflation in China and in Western countries is the fact that rising prices in the Asian economic powerhouse are reflective of robust domestic demand.
His confidence chimes with the view of Anthony Bolton, portfolio manager of China Special Situations. "I think that all emerging markets, China included, will have to get used to structurally higher inflation, but it should be remembered that the Chinese authorities have greater powers than other emerging markets to control prices. It would be wrong to underestimate what they can do on a one-to-two year view," said Bolton.