Yes, Germany Might Boost Inflation. Here's How

The Financial Times reports today that Germany’s central bank, the Deutsche Bundesbank, “has signaled it would accept higher inflation in Germany.” The newspaper story says this would be “part of an economic rebalancing in the euro zone that would boost the international competitiveness of countries worst hit by the region’s debt crisis.”

This leads to two questions: Is it true, and how could it happen?

The answer to the first question is, yes, it’s true, and it’s not even particularly surprising. Not enough to justify making it the main story on the front page. ”Of course, the Bundesbank is stating the obvious,” Christian Schulz, senior economist in London at Berenberg Bank, Germany’s oldest bank, wrote me today in an e-mail.

What’s obvious is that with other countries, such as Greece, sliding into deep recessions with falling prices, the only way the euro zone as a whole can stick to its inflation target is for the stronger countries, such as Germany, to permit inflation rates above the euro zone average. The European Central Bank sets a medium-term goal of under but close to 2 percent per year for inflation in the euro zone as a whole.

“It’s simple arithmetic,” says Kermit Schoenholtz, director of the Center for Global Economy & Business at New York University’s Stern School of Business.

So that’s the math. The second question is how one country can have higher inflation than another if they share a single currency.

Easily. Even different parts of the U.S. have different rates of inflation. For example, prices are rising faster in North Dakota these days because of the influx of people and machinery to extract oil and natural gas. Inflation differentials are bigger and more persistent in Europe than in the U.S. because the barriers within the euro zone are higher than the ones in the U.S. “dollar zone.” Labor, for example, doesn’t move as easily across national borders to places where wages are higher, so wages can get stuck at uncompetitive levels (as in, say, Spain).

For years, Germany had lower inflation than the likes of Greece, Portugal, and Spain. That was because the peripheral economies were growing rapidly and businesses were careless about keeping a lid on costs. Germany grew at a healthy clip as well but focused relentlessly on improving productivity, so its costs rose more slowly. That’s why Germany’s economy is far more competitive today.

“If the euro area is going to hang together over the long run, you have to undo those competitiveness gaps that have been created,” says Schoenholtz. The peripheral countries need to lower their prices relative to Germany’s. If Germany had very low inflation, those countries would require outright deflation, which is extremely painful. If Germany accepts somewhat higher inflation, primarily via more generous wages to workers, the rest of Europe can have a low but still positive inflation rate.

Says Schoenholtz: “To anybody who’s a monetary economist, this isn’t news.”

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Vietnam Signals Rate Cuts as Asia’s Fastest Inflation Eases

January 12, 2012, 12:40 AM EST By Bloomberg News

Jan. 12 (Bloomberg) -- Vietnam signaled that it may cut policy interest rates to “more suitable” levels after the first quarter and weaken the dong this year as Asia’s fastest inflation eases.

“The central bank will adjust policy rates to more suitable levels, aiming to help ease the average level of market interest rates,” central bank Governor Nguyen Van Binh said at a press conference yesterday.

Vietnam faces a trade deficit, risks in the banking sector and slowing economic growth as the global recovery falters. While Indonesia and Thailand have cut borrowing costs in recent weeks to shield expansion, the World Bank and International Monetary Fund said last month Vietnam may undermine progress toward economic stability if it loosens monetary policy too soon.

“Based on recent policy statements they’ve made and the fact that inflation is slowing and growth is weakening, and given the pressures they’re under, I would be 99 percent sure that he meant that the next adjustment in rates would be down,” Gareth Leather, a London-based economist at Capital Economics, said after Binh’s comments.

Vietnam needs to show credibility by sustaining stabilization efforts, Victoria Kwakwa, the World Bank’s country director in the nation, said yesterday in an interview in Hanoi.

“They have the opportunity to show that they are breaking with the past,” she said. “Vietnam is now about sticking with macro-stability when it is needed and not just throwing it to the wind when we have pulled back from the edge of the cliff.”

Weakening Currency

Consumer-price growth in 2012 may be less than 12 percent at worst and 8.5 percent to 9 percent in a “good” scenario, Binh said at an economic conference yesterday in the capital, compared with 18.13 percent in December.

Vietnam’s dong weakened 7.4 percent against the dollar last year, including a devaluation of about 7 percent in February. The currency climbed 0.1 percent to 21,013 per dollar yesterday. The VN Index of stocks closed up 0.8 percent.

“We believe that 2012 will be a hard year, a challenging year for Vietnam’s economy,” Binh said. “Slowing inflation is a prerequisite for interest rates to drop, but it doesn’t always happen like that.”

Purchases of dollars and gold by Vietnamese seeking stores of value have put pressure on the dong. Binh said the currency will gradually depreciate 2 percent to 3 percent this year.

The nation will also focus in the first quarter on easing bank liquidity challenges, including through restructuring five to eight lenders, Binh said.

Asset Quality

The banking sector is showing signs of stress and asset quality remains a “concern” given “unusually high” credit growth in recent years, the World Bank said last month.

Last year, the State Bank of Vietnam unveiled plans to create a three-tiered financial industry dominated by 15 lenders as part of efforts to allay concerns over the banking system.

Credit in Vietnam expanded 13 percent in 2011, Binh said. The nation targets a balance of payments surplus of $3 billion in 2012 and enough foreign-exchange reserves to cover 12-15 weeks of imports by 2015, he also said.

Vietnam’s inflation rate in December moderated from 19.83 percent in November. It remains the fastest in a basket of 17 Asia-Pacific economies tracked by Bloomberg.

If inflation eases to 9 percent, deposit rates will fall to 10 percent to 11 percent, Binh said. Interest rates will be stable in the three months through March, he said.

The State Bank of Vietnam cut its repurchase rate to 14 percent from 15 percent in July last year. The refinancing rate is 15 percent and the discount rate is 13 percent.

The economy, a production hub for companies such as Intel Corp., grew 5.89 percent in 2011, down from 6.78 percent in 2010.

--Diep Ngoc Pham, Nick Heath, Nguyen Dieu Tu Uyen and Jason Folkmanis, with assistance from Nguyen Kieu Giang in Hanoi. Editors: K. Oanh Ha, Sunil Jagtiani, Jake Lloyd-Smith

To contact Bloomberg News staff for this story: Diep Ngoc Pham in Hanoi at dpham5@bloomberg.net; Nick Heath in Hanoi at nheath2@bloomberg.net; Nguyen Dieu Tu Uyen in Hanoi at uyen1@bloomberg.net; Jason Folkmanis in Hanoi at folkmanis@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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Fed Nears Adoption of an Inflation Target

January 07, 2012, 5:49 AM EST By Craig Torres and Caroline Salas Gage

(Updates jobless figures in ninth paragraph.)

Jan. 6 (Bloomberg) -- Federal Reserve officials are nearing agreement on adopting an inflation goal as Chairman Ben S. Bernanke extends his push for improving transparency and communications with the public.

“We are very close to having inflation targeting in the U.S.,” James Bullard, president of the Federal Reserve Bank of St. Louis, said in a radio interview yesterday on Bloomberg Surveillance hosted by Tom Keene and Ken Prewitt. “We are getting closer to being able to make a committee-wide statement about these longer-term policy goal issues.”

An explicit numeric inflation objective would mark another step in Bernanke’s unprecedented campaign to open the Fed’s policy process to public view to boost accountability and effectiveness. The Fed chairman has also introduced regular press conferences and will publish the central bank’s own forecasts for the benchmark lending rate this month. At the same time, Bernanke is following a road already taken by central banks from Sweden to New Zealand.

“We’re in a situation where everyone is starting to appreciate the benefits of having the Fed be able to provide clear signals,” said Mark Gertler, a New York University economist and research co-author with Bernanke.

Deciding on the rate of inflation the Fed should shoot for is within reach, said Columbia University economist Frederic Mishkin, who helped shape the Fed’s approach to the question as a governor from 2006 to 2008.

More difficult will be agreeing on how to define full employment, which is also part of the Fed’s marching orders from Congress.

‘Sorted Out’

The inflation goal “has been sorted out” by the policy- setting Federal Open Market Committee, said Mishkin, who co- authored a 1999 book with Bernanke on inflation targeting. “The big problem is how you talk about the second part of the dual mandate. There are different views.”

Proponents of adopting an inflation target, such as Federal Reserve Bank of Philadelphia President Charles Plosser, point out that monetary policy directly influences prices. On the other hand, the rate of maximum employment the economy can sustain before wages and prices rise is dependent on other variables, such as the infusion of technology into the economy, which boosts productivity.

Mishkin said economists could argue that estimates for full employment today might range from a jobless rate of 4.5 percent to 7 percent. The unemployment rate unexpectedly fell to 8.5 percent in December, the lowest since February 2009, from 8.7 percent the month before, Labor Department figures showed today.

Leading Advocate

The 58-year-old Bernanke was a leading advocate of inflation targeting as a Princeton University professor when he co-authored the book “Inflation Targeting: Lessons from the International Experience” with Mishkin, Bank of England Monetary Policy Committee member Adam Posen and economist Thomas Laubach. At his nomination hearing in November, 2005, he said a numeric inflation goal would be a step “toward greater transparency.”

A subcommittee created by Bernanke and headed by Fed Board Vice Chairman Janet Yellen has been looking at ways to improve Fed communications. Its working tool to broker consensus on the dual objective of stable prices and maximum employment is a statement of the committee’s “longer-run goals and policy strategy.”

The statement “would name a target but it would also reiterate things we have said over the years about how keeping inflation low and stable contributes to great economic performance over all,” Bullard said in yesterday’s interview.

Longer-Run Forecast

Inflation will most likely be expressed in terms of changes to the personal consumption expenditures price index, Bullard said. The index rose 2.5 percent for the 12 months ending November. That’s above the Fed’s longer-run forecast which centers around 1.7 percent to 2 percent.

The presentation may even soften the notion of a target and simply describe a specific level of inflation that would help the Fed achieve its mandate of full employment over time, according to a person familiar with the discussions.

Gertler said a numeric inflation target would serve as both a tactical and transparency tool for the committee. Policy makers should communicate under what inflation conditions they’d start to withdraw their record stimulus, he said. The Fed has kept its key interest rate near zero since December 2008, and last month repeated a pledge to keep it there until at least mid-2013.

Symmetrical View

“One thing that’s probably worth clarifying is whether the Fed treats the target symmetrically, whether they view 2.5 percent inflation as worse than 1.5 percent inflation,” Gertler said. “As inflation gets to 2 percent, is the Fed going to aggressively tighten? As long as output is low, will they let it creep up?”

Policy makers’ speeches and statements haven’t made that clear, Gertler said. Fed Bank of Chicago President Charles Evans has advocated a promise to keep interest rates low until either unemployment falls below 7 percent or the medium-term inflation outlook rises above 3 percent. Plosser has pushed for an inflation objective of 2 percent.

“The chairman would like to get consensus on this one,” Mishkin said. “It is not easy to get everyone on board.”

FOMC participants “commented” on the draft statement in December, according to minutes of the meeting published this week. Bernanke “encouraged” the communications subcommittee to make refinements and present it to the FOMC again at the Jan. 24-25 meeting.

“Everybody on the committee is in favor of enhanced clarity, and exactly how you do it is the debate,” Gertler said. “They’re slowly making progress.”

--With assistance from Tom Keene and Ken Prewitt in New York. Editors: Christopher Wellisz, Gail DeGeorge

To contact the reporters on this story: Caroline Salas Gage in New York at csalas1@bloomberg.net; Craig Torres in Washington at ctorres3@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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Inflation Rise Tightens U.S. Food Spending

June 17, 2011, 1:38 PM EDT By Anna-Louise Jackson and Anthony Feld

June 17 (Bloomberg) -- McDonald’s Corp. and Wal-Mart Stores Inc. are getting a boost from value-minded consumers as rising commodity costs constrain discretionary income and confidence in the economy wanes.

Energy and food costs have risen 19 percent and 4 percent since December, according to the Labor Department. That caused real disposable income, or the money left over after taxes and adjusted for inflation, to remain unchanged. The confluence of higher prices and unemployment at 9.1 percent has become especially acute for households making less than $75,000 a year, according to David Schick, an analyst at Stifel Nicolaus & Co. in Baltimore.

“More-persistent inflation is affecting consumer confidence,” Schick said. “This may cause low-to-middle income consumers to trade down when shopping at retailers.”

The shift is similar to 2008, when commodity prices also soared, according to Christopher Low, chief economist at First Horizon National Corp.’s FTN Financial in New York.

“Real consumer spending began slowing gradually in November of last year and has now slowed to a standstill in the second quarter,” Low said.

Shoppers at BJ’s Wholesale Club Inc. are changing behavior, such as making different food choices to stay within their budget, Chief Executive Officer Laura Sen said on a May 18 conference call.

The Westborough, Massachusetts-based company’s members “will routinely shift their purchase patterns from item to item and even within categories,” Sen said. “They might trade down from beef to chicken or ground meats.”

Discount Prices

Wal-Mart’s discount prices are “getting more customers to show up” and buy more while in the stores, Wal-Mart West President Raul Vazquez said at the June 3 annual meeting.

Expectations about the outlook for the economy fell this month to the lowest level since March 2009, according to the Bloomberg Consumer Comfort survey. Concerns about jobs, as well as inflation, may influence where low-to-middle income consumers dine out, according to a monthly survey conducted by RBC Capital Markets.

For the first time in three quarters, spending plans at quick-service eateries, including McDonald’s, were stronger in May than at full-service restaurants such as P.F. Chang’s China Bistro Inc., according to Larry Miller, an RBC analyst in Atlanta. The number of consumers who said they won’t eat out as often in the next 90 days rose 25 percent, primarily because of higher energy costs, the survey showed.

This could result in a spending shift that is more concentrated in value-oriented restaurants, Miller said.

‘Most to Lose’

“It appears that the full-service dining industry has the most to lose from rising energy and food costs, while quick- service chains have the most to gain,” Miller said.

The number of people eating at McDonald’s, the world’s largest fast-food chain, is growing, helping to keep sales for the Oak Brook, Illinois, company at pre-recession levels, Chief Executive Officer James Skinner said at a June 1 conference hosted by Sanford C. Bernstein & Co.

The Bloomberg Quick Service Restaurant Index has risen 5 percent since March 31, while the Bloomberg Full Service Restaurant Index has declined 2 percent, Bloomberg data show. The outperformance reflects “the mindset of professional investors” and their reaction to high commodity prices, slow income growth and weak household wealth, according to Doug Cliggott, U.S. equity strategist at Credit Suisse Group AG.

Similarly, the Standard & Poor’s Supercomposite Hypermarkets & Supercenters Index, comprising BJ’s, Wal-Mart and Costco Wholesale Corp., has risen 3 percent since March 31, while the S&P 500 has declined 4 percent, according to Bloomberg data. Cliggott maintains an overweight rating on the Supercenters Index.

‘Longer Duration’

While these trends began in March 2010 before reversing in September, this year the relative performance “might be of a longer duration,” he said.

Foot traffic was up 5 percent in the quarter ended April 30 at Dollar Tree Inc., which operates more than 4,100 discount variety stores in the U.S. and Canada, Chief Executive Officer Bob Sasser said on a May 19 conference call.

“We are seeing ‘‘a flight to value,’’ Sasser said. ‘‘Not only are we getting new customers, we’re getting more repeat business because of the consumer products that we have.’’

A record high share of consumers -- 62 percent -- said in early June that low prices are the primary consideration when they select a retailer, according to a survey by Stifel Nicolaus. This could bode well for discounters, Schick said.

Wal-Mart may see positive U.S. comparable store sales as more people shop for discount-priced basics at the world’s largest retailer, having already delayed plans for discretionary items such as televisions, Schick said.

Five-Month High

The Wal-Mart Amalgamated Leading Economic Indicator, or Walei, which Schick developed in December 2009, rose to 5 in April, a five-month high -- a level consistent with outperformance for Wal-Mart relative to the S&P 500 stock index, Schick said.

Composed of eight macroeconomic indicators, Walei increases when economic conditions worsen or when inflation accelerates. April’s reading was driven by higher gasoline prices, up 36 percent from a year ago, and deteriorating home sales, down 12 percent, Schick said. It has ranged from minus 16 to plus 10 since 2002.

Any sales boost discounters are getting from more-frugal customers may fade when the economy improves, FTN’s Low said.

‘‘If we get relief from falling commodity prices, then that has an equal and opposite effect for consumers,” he said. “It frees up money to be spent on other things again.”

Cheaper Patio Set

Even so, companies may find it difficult to raise prices if people become accustomed to discounts. Costco eliminated the cheaper of two patio sets in 2010, even though the lower-cost option outsold the more-expensive one, as the Issaquah, Washington-based wholesaler “tried to trade the customer up,” Chief Financial Officer Richard Galanti said on a May 25 conference call.

“If you’re trading the customer down, it’s darned tough to get them back,” he said.

--Editors: Melinda Grenier, Daniel Moss

To contact the reporters on this story: Anna-Louise Jackson in New York at ajackson36@bloomberg.net; Anthony Feld in New York at afeld2@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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Sports-Gear Prices May Rise in Latest Sign of Inflation

June 02, 2011, 12:47 AM EDT By Anna-Louise Jackson and Anthony Feld

June 2 (Bloomberg) -- Retailers are poised to boost prices on athletic footwear, apparel and sports equipment as they join other industries in passing along rising costs for commodities, foreign labor and freight.

More than 90 percent of sporting-goods manufacturers paid higher input costs in the first quarter, and 41 percent of these companies already increased wholesale prices, according to a quarterly survey of private, independent vendors and retailers conducted by Robert W. Baird & Co.

“This clearly demonstrates the emerging cost and price pressure across the sporting-good space,” said Peter Benedict, a retail analyst in Stamford, Connecticut, at Baird. “We’re hearing a consistent message from vendors and retailers that cotton, fuel and wage costs are starting to go up, and they’re slowly going to come through on the retail side later this year and certainly in 2012.”

When prices manufacturers paid for imported sporting goods grew 3.3 percent in 2008, retail price tags increased 3 percent, according to data from the Bureau of Labor Statistics. That pattern likely will be repeated following a 2.1 percent rise in April for imported goods compared with a year ago, said Dean Maki, chief U.S. economist at Barclays Capital in New York.

With these prices at the highest level in almost two years, “it would be reasonable” for consumers to pay more, Maki said.

Sporting goods is the latest industry to exercise pricing power, following similar moves by airlines, restaurants and the broader apparel sector that are starting to show up in the consumer price index, Maki said. The Federal Reserve’s preferred gauge, the personal-consumption expenditure index excluding food and energy, rose 1 percent in April from a year earlier, the most since September 2010.

Not Worried

“The Fed is still aiming for higher core inflation, so it will not be worried if retailers are able to pass along some of these price increases,” Maki said.

Policy makers have been boosting their forecast for 2011 inflation excluding food and energy, with the April projection at about 1.5 percent, compared with the January estimate of about 1.2 percent.

Twenty-five percent of sporting-goods retailers already raised prices on apparel in the first quarter, compared with 17 percent a year earlier, Benedict’s data show.

Nike Inc. introduced a women’s version of its “Dri-Fit Legend” T-shirt for $22 in February. Sales exceeded expectations, indicating that “consumers ate the extra $2” and signaling that its $20 men’s version soon will cost more, predicted Michael Binetti, an analyst for UBS Securities in New York.

Missed Estimates

Nike, maker of Air Jordan shoes and VR Pro golf clubs, will “take more significant price increases across a broader range of styles” beginning in spring 2012, Chief Financial Officer Don Blair said on a March 17 conference call after the company reported revenue and profits that missed analysts’ estimates.

Nike’s plans drew criticism from investors because the company didn’t raise prices quickly enough to offset higher input costs, Binetti said. Its stock fell 9.2 percent on March 18. Since Dec. 31, 2009, Nike is up 24 percent, compared with a 48 percent rise in the S&P Retail Exchange-Traded Fund and an 18 percent increase in the S&P 500 ETF.

Binetti said he expects the Beaverton, Oregon-based company will begin raising prices “fairly broadly” in July on apparel before the back-to-school shopping rush, with footwear later this year or in early 2012.

‘Good Traffic-Drivers’

Under Armour Inc., which makes sporting apparel, shoes and gear, also is planning broad-based adjustments next year, said Brad Dickerson, chief financial officer, on an April 26 conference call. The Baltimore-based company and Nike are “good traffic-drivers” for retailers such as Dick’s Sporting Goods Inc. and Foot Locker Inc., Binetti said.

“These are the kinds of companies big-box stores want to lean on for price increases because they have good products,” he said.

Retailers obviously want to push along higher input costs to consumers, “the question is, can they get away with it,” asked Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. With unemployment at 9 percent, gasoline prices averaging near $4 a gallon nationwide and no significant boost in wages yet, he predicts across-the-board increases won’t come until the second half of 2012, at the earliest.

“Retailers are likely hoping the economy will pick up out of these doldrums, but without that, I think it’s going to be a challenge for them to raise prices,” Feroli said.

Track Record

Retailers that do go ahead with increases will avoid a one- size-fits-all approach, Benetti said. Companies that will be successful “have earned their pricing power through a proven, sustained track record for innovation.”

While New York-based Foot Locker already is raising some prices, it likely will make more changes in “targeted, sensible ways,” during “the latter part of the year,” Chief Executive Officer Kenneth Hicks said on a May 20 conference call. “We believe these price increases will, in general, be accepted by our customers despite the macroeconomics headwinds,” he said.

--Editors: Melinda Grenier, Christopher Wellisz

To contact the reporters on this story: Anna-Louise Jackson in New York at ajackson36@bloomberg.net; Anthony Feld in New York at afeld2@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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Rising Rents Risk U.S. Inflation

May 30, 2011, 7:23 PM EDT By Joshua Zumbrun

May 31 (Bloomberg) -- For all the attention given to almost $4-a-gallon gas, the biggest threat to containing U.S. inflation may be the shift away from homeownership, which is pushing up the cost of leases across the nation’s 38 million rented residences.

Shelter represents about 40 percent of the consumer price index excluding food and energy and accounted for almost one quarter of the 1.3 percentage point rise in April. That share has grown as falling home prices shake Americans’ confidence in housing as an investment.

Federal Reserve Chairman Ben S. Bernanke and his colleagues say they will hold interest rates at record lows for an “extended period,” based on an assessment that slack in the economy from 9 percent unemployment will help subdue core inflation and any threat of accelerating prices likely will be “transitory.” Not everyone agrees with that judgment.

“They should have looked at rents,” said Maury Harris, chief U.S. economist in New York at UBS Securities LLC, whose team at UBS was the most accurate inflation forecaster over 2009 and 2010, according to Bloomberg calculations. “They’re putting too much weight on the ‘slack is all that matters’ theory. It matters but, for heaven’s sake, it’s not all that matters.”

Housing has become “a contributor to inflation, and it continues to rise,” agreed Bruce McCain, chief investment strategist at the private-banking unit of KeyCorp in Cleveland, with $22 billion in assets under management. That’s partly why he’s advising clients to look at “specifically, a heavier mix of equities, and maybe the use of TIPS to mitigate the effects inflation could have over 10 years or longer.”

Investor Expectations

Investor expectations of rising prices in the next decade, as measured by the spread between Treasury Inflation Protected Securities and nominal bonds, have fallen to 2.28 percent from 2.66 percent on April 11, the year-to-date high.

“When you look at the longer-term portion of a bond portfolio, consider pretty carefully the ravaging effects that inflation could have,” McCain said in an interview. He estimates that rents have accounted for about 1 percentage point of the last decade’s 2.4 percentage point rise in prices and soon may revert to or overshoot this trend.

“The worse it gets for apartment rentals, the more you’re going to see that number adding to the overall inflation rate,” he said.

Harris calculates that prices excluding food and energy have risen at an annual rate of 2.1 percent so far this year based on the consumer price index. The Fed’s preferred gauge, the Department of Commerce personal-consumption expenditure index, rose 1 percent in April from a year earlier. Including all items, it increased 2.2 percent.

‘That’s Ridiculous’

Policy makers are “misreading the inflation, period,” Harris said in an interview. “If you have a healthy rate of core inflation, you don’t have any business having the federal funds rate under 25 basis points. That’s ridiculous.” The Fed cut the target rate for overnight loans among banks to near zero in December 2008.

Confidence in homeownership has been battered in the wake of the subprime-mortgage crisis, which pushed housing prices down 33 percent since July 2006, based on the S&P/Case-Shiller index of property values in 20 cities. More than 3 million homes have been seized in foreclosure since the start of 2008, according to RealtyTrac Inc., and the rate of homeownership has fallen to 66.4 percent, the lowest since 1998, data from the Census Bureau show.

About two-thirds of Americans now think buying a home is a safe investment, down from 83 percent in 2003, said government- supported mortgage financier Fannie Mae in a national survey released May 11.

‘Lowest Level’

The percentage of AvalonBay Communities Inc. residents moving out to purchase a residence fell to 12 percent in the first quarter, down from 15 percent in the last quarter of 2010 -- “the lowest level since we began tracking this data,” Chairman and Chief Executive Officer Bryce Blair said in a April 28 analysts’ call.

AvalonBay is the second-biggest publicly traded U.S. apartment owner with more than 50,000 units in the Northeast, Mid-Atlantic, Midwest, Pacific Northwest and Northern and Southern California. First-quarter funds from operations climbed 18 percent to $93.5 million from a year ago as rising demand helped it increase rents, the Arlington, Virginia-based company said in an April 27 statement.

“Job growth, particularly among young workers, is driving higher rental demand, while new supply remains muted,” Blair said in the statement. “We expect fundamentals will continue to accelerate during the year.” AvalonBay stock has risen 16 percent this year.

Biggest Increase

U.S. apartment rents climbed 5 percent in the 12 months through April, according to research company Axiometrics Inc. Effective rents in the first quarter, or what tenants actually paid, rose in 75 of the 82 markets tracked by data provider Reis Inc., which said the average was up 2.5 percent from a year earlier to $991 a month.

“Landlords have a couple years of runway to have pricing power over their tenants,” said Anthony Paolone, an analyst at JPMorgan Chase & Co. in New York. He recommends that investors looking to profit financially from the increases should consider a trio of real-estate investment trusts: Palo Alto, California- based Essex Property Trust Inc., UDR Inc. in Highlands Ranch, Colorado, and Equity Residential in Chicago.

UDR has risen 8.8 percent since January, Equity Residential climbed 17 percent and Essex jumped 18 percent. The Standard & Poor’s 500 Index increased 5.8 percent in the same period.

Boon, Burden

The boon for landlords is a burden for residents like Alexander Shevlyagin, a 25-year-old Seattle computer-software manager, who said he was shocked to learn his rent is rising to $1,305 a month from $935 and his free parking space will cost $100.

“My building manager told me, ‘Hey, we’re almost at full occupancy,’” Shevlyagin said. “He said he signed the same place I have on a different floor for the new rates, so someone thinks that this is reasonable. Knowing what I’m paying right now, I don’t consider it reasonable.”

From January until October 2010, rents helped hold down overall inflation as the year-over-year change in shelter -- mainly rents and what owners would receive if they rented their homes -- was negative, according to data from the Bureau of Labor Statistics. Then the component turned positive in November. Rental yields, or rents relative to home prices, will climb this year to the highest level in more than 20 years and remain elevated for as many as four years, predicts Paul Dales, senior U.S. economist in Toronto for Capital Economics Ltd.

‘May Be Surprised’

“I’m sure it’s something the Fed is watching, but I wouldn’t be too surprised if they haven’t factored in such a rise,” Dales said. “It’s possible the Fed may be surprised there.”

At their April meeting, Fed officials projected core inflation for 2011 between 1.3 percent and 1.6 percent; their estimate for 2012 was 1.3 percent to 1.8 percent.

“With resource slack likely to diminish only gradually over the next few years, it seems reasonable to anticipate that underlying inflation will remain subdued for some time, provided that longer-term inflation expectations remain well contained,” Fed Vice Chairman Janet Yellen said in a April 11 speech in New York.

While rents weren’t mentioned in the minutes of the April meeting, the Fed’s April 13 Beige Book report, an anecdotal survey of economic conditions, was peppered with stories of rising costs.

Manhattan, Boston, Chicago

In Manhattan, studio-apartment leases “continued to climb and were up more than 10 percent from a year ago.” In Boston, apartment “rental-rate increases persist,” and contacts in Chicago reported “developing strength in the rental market and a corresponding pick-up in conversions of condominiums into apartments.”

The Fed may be falling behind the curve, said Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania. Rising rents are “a risk to the core, which is the important number if you’re looking at Fed policy,” he said, estimating the rate could top 2 percent by the end of this year.

“It’s clearly a cost-of-living issue, especially as people who were in the homeownership market are winding up in the rental market,” he said.

--With assistance from Oshrat Carmiel in New York. Editors: Melinda Grenier, Kenneth Fireman

To contact the reporter on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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Euro-Area Inflation Slowed in May, Easing Pressure on ECB

May 31, 2011, 7:48 AM EDT By Simone Meier

(Updates with comment from economist starting in fourth paragraph.)

May 31 (Bloomberg) -- European inflation unexpectedly slowed in May, giving the European Central Bank room to keep borrowing costs on hold next month.

Inflation in the 17-nation euro region slowed to 2.7 percent from 2.8 percent in April, the European Union’s statistics office in Luxembourg said today in an initial estimate. Economists had forecast no change in the inflation rate, the median of 33 estimates in a Bloomberg News survey showed. Unemployment held at 9.9 percent in April from the previous month, a separate report showed.

ECB President Jean-Claude Trichet has signaled that the central bank may keep interest rates on hold in June after last month increasing the benchmark rate 25 basis points to 1.25 percent to fight price pressures. With the recovery losing momentum and governments cutting spending to plug budget gaps, the Organization for Economic Cooperation and Development said on May 25 that further rate increases “are not required immediately.”

“The decline was largely down to lower energy prices and the unwinding of the ‘late Easter effect,’ which led to a surge in inflation in the leisure and entertainment sector last month,” Martin van Vliet, an economist at ING Groep NV in Amsterdam, said in an e-mailed note to investors.

Energy, Food Prices

“Looking ahead, euro-zone headline inflation is set to stay well above 2% in the remainder of this year as energy and food prices continue to have an upward impact on consumer prices,” van Vliet said.

The euro extended gains after the data were released, trading at $1.4415 at 11:34 a.m. in Brussels, up 0.9 percent.

The OECD forecasts euro-region growth to accelerate to 2 percent this year from 1.7 percent in 2010, with unemployment averaging 9.7 percent and 9.3 percent this year and next. Harmonized consumer prices may rise 2.6 percent in 2011 and 1.6 percent in 2012, the Paris-based group said.

Crude oil prices have surged 38 percent in the past year, trading at $102.03 a barrel today. That’s putting pressure on companies to protect earnings and pass on higher costs. Euro- region producer-price inflation unexpectedly accelerated in March and a gauge measuring households’ confidence in their ability to purchase big-ticket items in the coming year dropped in May from the previous month.

‘Second-Round Effects’

“We have to avoid commodity-price increases becoming entrenched in longer-term inflation expectations, which could have second-round effects on wages and prices,” Trichet said on May 26. “We are carefully monitoring the situation and we stand ready to do whatever is necessary.”

With rising prices sapping consumers’ spending power and governments from Spain to Ireland toughening austerity measures, the euro-region economy may struggle to gather strength. European services and manufacturing growth weakened in May and German investor confidence dropped more than economists forecast. European economic confidence also declined.

About 15.5 million people were unemployed in April, down 115,000 from the previous month, today’s report showed. At 20.7 percent, Spain had the highest jobless rate within the euro region. The Netherlands and Austria reported the lowest rate at 4.2 percent.

Michael O’Leary, chief executive officer of Ryanair Holdings Plc, Europe’s largest discount airline, told Francine Lacqua on Bloomberg Television’s “Countdown” on May 23 that while he’s “quite concerned” about economies, he remains “cautiously optimistic” for the full year.

‘Under Control’

“We have the costs very well under control,” O’Leary said. “We do better in a downturn because everybody gets more price-sensitive. We see strong growth in the first half of the year, being the summer months. As oil prices rise, we are going to cut capacity during the winter months.”

The statistics office will release a breakdown of May consumer prices next month. Euro-region core inflation accelerated to 1.6 percent in April from 1.3 percent in the previous month. That’s the fastest pace since April 2009.

The ECB is scheduled to hold its next monetary assessment on June 9 in Frankfurt.

--With assistance from Jurjen van de Pol in Amsterdam, Kristian Siedenburg in Budapest and Francine Lacqua in London. Editors: Patrick Henry, Jennifer M. Freedman

To contact the reporter on this story: Simone Meier in Zurich at smeier@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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In Brazil, the Bikini Wax Is a Harbinger of Inflation

Thales Stadler/Agencia Estado/ZumaPress

By Iuri Dantas

If you're getting a bikini wax in Brazil, you'll likely find that the cost is rising. And if you're an economic policy maker, you'll likely see that as a problem, since the bikini wax is one of the items the Brazilians track to figure out inflation.

As with services ranging from car repair to dentistry, the price of waxing is going up in one of the world's most important emerging markets. Inflation is moving above the government's target and may force Alexandre Tombini, the central bank president, to prolong his policy of interest-rate hikes.

Price increases for services, which make up 24.1 percent of Brazil's benchmark inflation index, outpaced all other categories in the past two months, according to data released on May 11 by the central bank. They rose 8.57 percent in the year through April, the fastest pace in at least 15 years. "Services will continue to be the main villain of inflation," says Fernando Fix, chief economist at Votorantim Wealth Management in Sao Paulo. "Domestic demand is too strong."

That includes demand for bikini waxes, which are often considered a necessity, says Elzimar Siqueira, former owner of a beauty shop and now head of administrative affairs at the Syndicate of Women's Beauty and Hairdressing Institutes of Rio de Janeiro. "We have summer all year, we're always wearing bikinis and miniskirts," she says. At the Imaculada Hair and Makeup shop in Brasilia, owner Alessandra Rita de Arruda Lopes says she's raised the price to 35 reais ($21.63) from 30 reais. The average price of the depilation procedure rose 12.4 percent in the year through April, the national statistics agency says. A bikini wax at J. Sisters in Manhattan costs $75.

Consumer price increases in Latin America's biggest economy breached the government's 6.5 percent target ceiling in the year through April for the first time since June 2005. The benchmark interest rate has now reached 12 percent, and economists expect the central bank to boost it to 12.5 percent by year-end, a recent survey showed.

Gross domestic product per capita reached a record $10,813 last year, after the economy grew 7.5 percent, the fastest pace in more than two decades. Such growth boosts demand for services. Also contributing to higher prices is a tight labor market, which drives wages up. Wages may be bumped up again after collective bargaining late this year and next, says Constantin Jancso, an economic analyst at Sao Paulo-based HSBC Bank Brasil. "Negotiations with metalworkers and bankers begin in the third quarter," he says. "I wouldn't be surprised to see increases of 10 percent."

Prices of 20 of 41 services monitored by the central bank accelerated in April from March. Oil changes and car cleaning prices rose 18.25 percent in the year through April. Hotels increased prices by 14.03 percent.

Price hikes in Brazil are also spurred by indexation, in which past inflation is used as a benchmark for raising prices. The minimum wage, for example, is computed annually by adding the previous year's inflation to economic growth from two years back. In 2012 the minimum wage will likely go up more than 13 percent.

Higher wages are one reason beauty shop owner Lopes is raising prices. Meal vouchers, cosmetics, and the cost of "depi rolls," which are used to spread the wax for depilation, are also rising, she says. "Some clients are coming less frequently for haircuts because of the higher price," she says. "But not for waxing. Brazilian women will never stop getting waxed."

The bottom line: Services from bikini waxes to car repairs are getting pricier in Brazil, prompting fears of higher inflation and higher wages.

Dantas is a reporter for Bloomberg News.

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Fed Focusing on Inflation Expectations with Policy Unchanged

May 22, 2011, 7:22 PM EDT By Caroline Salas and Scott Lanman

May 23 (Bloomberg) -- The cue for the Federal Reserve to start withdrawing its record monetary stimulus may be a measure of its own credibility: inflation expectations.

Expectations for annual consumer-price gains have jumped by 43 percent to 2.10 percentage points since the central bank began its second round of asset purchases in November, as measured by the breakeven rate for five-year Treasury Inflation Protected Securities. The measure is close to levels before the recession -- when the central bank’s benchmark interest rate was 5.25 percent, compared with about zero today.

“It’s highly likely that some movement in inflation expectations will be the first signal that they need to take action,” said J. Alfred Broaddus, 71, former president of the Federal Reserve Bank of Richmond, whose career dates back to the inflation surge of the 1970s. “The Fed is right to be watching this very, very closely.”

Central bankers are starting to debate how and when to tighten policy after buying $2.3 trillion of assets to bring the economy out of the recession. William C. Dudley, president of the Federal Reserve Bank of New York, says the Fed still has a “considerable way to go” to reduce unemployment from 9 percent, while other policy makers, including the Philadelphia Fed’s Charles Plosser and Richard Fisher of Dallas, say waiting too long to tighten risks igniting inflation.

“This is one of those really critical turning points in monetary policy where it’s pretty clear the next move is toward tightness, and the whole question is timing,” Broaddus said.

Buying TIPS

Sean Simko, who oversees $8 billion in fixed-income assets at SEI Investments Co. in Oaks, Pennsylvania, said he’s buying Treasury Inflation Protected Securities because higher commodity prices are stoking inflation. Five-year breakeven rates reached 2.47 percentage points on April 29, their highest level in almost three years.

“The TIPS market represents a fair assessment of inflationary pressures,” Simko said. Breakeven rates are the yield difference between TIPS and comparable maturity Treasuries and are a measure of the outlook for consumer prices over the life of the securities.

Dudley, in a May 19 speech in New Paltz, New York, said the central bank is falling short of its goals because unemployment is too high and inflation is likely to ease. While measures of the public’s view of inflation “remain stable,” Dudley said, “it is critical that we ensure that inflation expectations do not become unmoored.”

Bernanke Press Conference

Chairman Ben S. Bernanke, in his first press conference April 27, indicated that the central bank won’t remove stimulus immediately after ending $600 billion in bond purchases in June. At the same time, he highlighted inflation expectations as a reason the Fed might tighten credit.

“If inflation persists or if inflation expectations begin to move, then there’s no substitute for action,” Bernanke, 57, said following a meeting of the Federal Open Market Committee. “We would have to respond.”

Policy makers watch expectations because they can fuel actual inflation. Businesses may raise prices in anticipation of higher production costs, while consumers can demand higher wages to keep up with the price of goods. Unless restrained by central banks, the two processes together can accelerate inflation.

“It is much harder to keep inflation in check if people begin to raise their expectations of inflation,” Dudley said in his May 19 speech.

Inflation is a “mindset,” and consumers build their expectations into their behavior, said Ward McCarthy, chief financial economist at Jefferies & Co. in New York. While breakeven rates are within the Fed’s target range, “they’re right on the frontier. There’s not a lot of breathing room.”

‘Important Force’

Inflation expectations, especially long-run projections, “are an important force in inflation dynamics,” according to a 2008 research paper from the Federal Reserve Bank of Kansas City by Todd E. Clark, who’s now a vice president at the Cleveland Fed, and Troy Davig, now a senior economist at Barclays Capital in New York. “Even small movements in long-run expectations can represent a persistent source of pressure on inflation,” they wrote.

The authors cite as evidence several studies showing a link. The Fed’s own computer model of the U.S. economy uses long-run expectations, as measured by surveys of professional economists, as a “key determinant of inflation behavior,” Clark and Davig said.

The central bank aims for an inflation rate of about 1.7 percent to 2 percent, based on last month’s long-run economic projections of Fed governors and regional presidents.

Jeans, Hamburgers

Prices in March rose 1.8 percent from a year earlier, accelerating for a fourth straight month to the fastest pace since May 2010, as companies from San Francisco-based jeans supplier Levi Strauss & Co. to Oak Brook, Illinois-based fast- food chain McDonald’s Corp. announced price increases to make up for rising prices of cotton, wheat and other raw materials.

Excluding food and fuel, prices rose 0.9 percent in March from a year earlier, near a five-decade low of 0.7 percent. Fed officials prefer the so-called “core” measure because food and fuel costs are more volatile.

Inflation, including all items, has averaged 2.1 percent a year over the past 10 years, and the same rate over the prior decade. It was 4.8 percent during the 1980s and 6.7 percent in the 70s, based on the Commerce Department’s personal consumption expenditures price index.

St. Louis Fed President James Bullard said May 18 that central bankers are “determined” to avoid a repeat of the 1970s inflation. Paul Volcker, who took over as chairman in 1979, kept the federal funds rate on overnight loans among banks above 8 percent for more than five years, pushing it as high as 20 percent.

Forecasters Erred

During that decade, “forecasters consistently underpredicted the future level of inflation, seeing considerably more disinflation from a particular policy stance than in fact occurred,” former Fed Vice Chairman Donald Kohn said in a 2007 speech. Fed staff economists and bond investors both made such mistakes, Kohn said.

“I lived through that whole thing, and it was awful,” said Broaddus, who joined the Richmond Fed in 1970 and ran it from 1993 to 2004. Even though there hasn’t been an incident of similar magnitude since then, policy makers “know that can happen,” he said. It’s “always out there as the lesson of what can happen if the Fed begins to lose focus on its main job of focusing on price stability.”

Now Fed officials often speak of the credibility they regained from Volcker’s inflation victory and how careful they must be not to let it slip away.

Business Cycle

“This is the point in the business cycle when the risk of losing a bit of credibility and risk of losing ground on inflation is highest,” Jeffrey Lacker, the current president of the Richmond Fed, told reporters May 10.

The market-based measure of inflation five to 10 years out “is a proxy on their credibility completely,” Davig said. “Any kind of financial market movement that would indicate the market’s lack of belief in the Fed’s ability to execute a smooth exit strategy -- the Fed’s completely fearful of that.”

The five-year breakeven measure has dropped 0.37 percentage points since the end of April, even as the total Consumer Price Index rose 3.2 percent last month from a year earlier. A measure of inflation five to 10 years out has fluctuated this year in a range of 2.77 percent to 3.14 percent.

Five-year breakevens traded in a range of 2.08 percent to 2.91 percent from 2004 through July 2007, just before concerns over the value of housing debt sent banks’ borrowing costs surging. The five-to-10-year index traded from 2.34 percent to 3.31 percent.

‘Timely Manner’

A minority of Fed officials are concerned that the Fed’s record balance sheet risks igniting dangerous price increases. A failure to exit “in a timely manner could have serious consequences for inflation and economic stability in the future,” Philadelphia’s Plosser said in a March speech.

“Should it prove necessary to counter inflationary pressures, I will be among the first to advocate the unwinding of some of the stimulus we have provided,” Fisher said May 4.

Any interest-rate increase may still be far off, as the threat of rising expectations receded this month, giving the Fed breathing room. “You’ve got global uncertainties, some of which are abating, commodity prices moving off their peaks and oil prices drifting down, so I think that’s helpful,” Bullard said in an interview May 18.

‘Transitory’ Inflation

While the FOMC reiterated its view in the April 27 statement that the boost to inflation from higher commodity prices will be “transitory,” Fed officials must be careful not to assume both food- and energy-price increases will dissipate and have little persistent effects on inflation, Davig said in an interview.

“Food prices have a tendency, when they go up, to be more persistent, and we do see that spillover from higher food prices into longer-term measures of inflation,” he said.

The attention the Fed pays to inflation expectations means investors, whether they agree with the central bank or not on the measures’ importance, must pay attention themselves.

“The Fed absolutely does believe that inflation expectations matter,” said Steve Lear, who helps oversee $130 billion as deputy chief investment officer at J.P. Morgan Asset Management in New York. “Needless to say, we care because the Fed cares.”

--With assistance from Craig Torres in Washington. Editors: Christopher Wellisz, Carlos Torres

To contact the reporters on this story: Caroline Salas in New York at csalas1@bloomberg.net; Scott Lanman in Washington at slanman@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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China Orders Banks to Set Aside More Cash to Cool Inflation

May 12, 2011, 7:00 AM EDT By Bloomberg News

(Adds economist’s comment in third paragraph.)

May 12 (Bloomberg) -- China raised banks’ reserve requirements for the fifth time this year to restrain prices, adding to the likelihood that growth will slow in the world’s second-biggest economy.

Reserve ratios will increase 0.5 percentage point from May 18, the People’s Bank of China said on its website today. The requirements currently stand at 20.5 percent for the biggest lenders.

Premier Wen Jiabao aims to tame inflation that exceeded 5 percent for a second month in April without choking off growth that peaked at 11.9 percent during last year. Economic activity is moderating and scarcer credit and a softening real-estate market will drag on investment, a New York-based research organization, The Conference Board, said last month.

“Given the mounting inflationary pressure and still relatively strong economic growth, we expect inflation control to remain the top policy priority,” Peng Wensheng, a Hong Kong-based economist for China International Capital Corp. Ltd., said before today’s announcement.

A Chinese manufacturing index fell in April from March, signaling the economy may cool after expanding an annual 9.7 percent in the first quarter.

Stronger Yuan

Officials have accelerated gains in the yuan, which broke 6.5 per dollar for the first time since 1993 on April 29 as the U.S. currency slid. A stronger yuan helps to reduce import costs.

The ruling Communist Party aims to prevent public discontent at increases in food and housing costs from fueling unrest.

Unilever, the world’s second-largest consumer-goods maker, said March 31 that it was among companies to have postponed price increases at the government’s request. Officials later announced that the company will be fined for telling the media about plans to increase prices.

Higher commodity costs, inflows of speculative capital, and the extra cash from a stimulus program started in late 2008 have added to inflation risks. The nation’s world-record foreign-exchange reserves exceeded $3 trillion for the first time in March.

Consumer prices jumped 5.4 percent in March, the most since July 2008. In April, the gain was 5.3 percent. Besides raising interest rates and lenders’ reserve requirements, the government has guided banks to reduce levels of new lending.

--Editors: Paul Panckhurst, Ken McCallum

To contact Bloomberg News staff for this story: Paul Panckhurst in Hong Kong at ppanckhurst@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst in Hong Kong at ppanckhurst@bloomberg.net

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Asian Stocks Drop as Commodities Tumble Amid Inflation Concern

May 12, 2011, 7:11 AM EDT By Shani Raja

May 12 (Bloomberg) -- Asian stocks fell, with the key regional index set for its biggest slide since markets crashed in the wake of Japan’s record earthquake in March, as commodity prices tumbled amid concern that China will further tighten monetary policy.

BHP Billiton Ltd., the world’s largest mining company, dropped 2.6 percent in Sydney after oil and metal prices sank yesterday in New York. Jiangxi Copper Co., China’s No. 1 producer of the metal, declined 2.2 percent in Hong Kong. Korea Zinc Co. slid 5.7 percent in Seoul, while Mitsubishi Corp., Japan’s biggest commodities trader, fell 2 percent. Olympus Corp., an optical-equipment maker, lost 5.6 percent in Tokyo after reporting an 85 percent slump in profit.

The MSCI Asia Pacific Index declined 1.6 percent to 136.14 as of 7:44 p.m. in Tokyo after commodity prices tumbled yesterday as China reported faster-than-estimated inflation and as the U.S. Federal Reserve gets closer to ending a $600 billion asset-purchase program, known as quantitative easing, in June.

“Markets always struggle with tightening cycles,” said James Holt, Sydney-based director of BlackRock Investment Management (Australia) Ltd., which oversees about $40 billion in assets. “The China inflation data yesterday shows that the country will need to do more tightening. This comes at the same time as investors pre-empt the end of the second round of quantitative easing, which has pumped up asset and commodity markets.”

Nikkei, Kospi

The gauge is headed for its steepest drop since March 15, when it fell 5 percent as Japanese stocks plunged amid a nuclear crisis triggered by a magnitude-9 earthquake and ensuing tsunami on March 11.

Japan’s Nikkei 225 Stock Average fell 1.5 percent and South Korea’s Kospi Index lost 2 percent. Hong Kong’s Hang Seng Index retreated 0.9 percent. Australia’s S&P/ASX 200 Index decreased 1.8 percent on a day the statistics bureau reported that the nation’s employers unexpectedly cut workers in April by the most since 2009.

Futures on the Standard & Poor’s 500 Index lost 0.6 percent today. In New York yesterday, the index slumped 1.1 percent, its biggest decline since March 16.

The MSCI Asia Pacific Index rose 0.5 percent this year through yesterday, compared with gains of 6.7 percent by the S&P 500 and 2.9 percent by the Stoxx Europe 600 Index. Stocks in the Asian benchmark were valued at 13.6 times estimated earnings on average at yesterday’s close, compared with 13.6 times for the S&P 500 and 11.3 times for the Stoxx 600.

BHP, Korea Zinc

The Asia-Pacific gauge has risen close to 5 percent and commodity prices have surged since Nov. 3 when a U.S. plan to buy Treasuries was unveiled. The Fed said last month it won’t need to extend the $600 billion program beyond its scheduled end next month.

BHP Billiton, also Australia’s No. 1 oil producer, lost 2.6 percent to A$44.13 in Sydney, while Rio Tinto Group, the world’s No. 2 mining company by sales, retreated 2 percent to A$79.79. Jiangxi Copper slumped 2.2 percent to HK$24.10 in Hong Kong.

Korea Zinc slid 5.7 percent to 367,500 won in Seoul and Mitsubishi Corp. declined 2 percent to 2,112 yen in Tokyo.

China Growth Risk

“The volatility in commodity prices and concerns about future policy direction in China have increased investor uncertainty,” said Tim Schroeders, Melbourne-based manager at Pengana Capital Ltd., which oversees about $1 billion. “Any perception that risks to the Chinese growth story are increasing will see investors react swiftly to adjust.”

Material and energy stocks led today’s declines after crude oil for June delivery plunged 5.5 percent to settle at $98.21 a barrel yesterday in New York. Copper fell to the lowest price in five months after China reported inflation remains above the government’s target, signaling further monetary-policy tightening that may curb metal demand.

The London Metal Exchange Index of six metals including copper and aluminum lost 1.9 percent yesterday, its first drop in four days.

“The inflation concern is causing investors to avoid risk assets,” said Mitsushige Akino, who oversees about $600 million in Tokyo at Ichiyoshi Investment Management Co. “That is the underlying reason for a slump in the commodity market.”

Consumer Prices

Consumer prices in China rose 5.3 percent from a year earlier and banks extended 740 billion yuan ($114 billion) of local-currency loans, according to reports yesterday from the statistics bureau and central bank.

Inflation is “the most pressing problem” facing the world’s second-biggest economy, Vice Premier Wang Qishan said this week. Monetary policy will remain “prudent” and focus on removing “inflationary monetary elements,” Chinese officials said in a statement in Washington after talks with the U.S.

Oil refiners dropped today after gasoline prices yesterday sank the most since February 2009 in New York. S-Oil Corp. slumped 6.3 percent to 134,000 won in Seoul, while SK Innovation Co. fell 4.7 percent to 215,500 won. In Sydney, Caltex Australia Ltd., Australia’s largest oil refiner, slid 1.3 percent to A$14.35.

Olympus dropped 5.6 percent to 2,281 yen in Tokyo. The company said full-year net income tumbled 85 percent to 7.38 billion yen as sales fell and did not disclose a profit forecast for this year.

Also in Tokyo, Citizen Holdings Co. decreased 7.3 percent to 459 yen. The watchmaker booked 5.12 billion yen ($63 million) in net income for the year ended March 31, missing its forecast by 27 percent.

--With assistance from Norie Kuboyama and Toshiro Hasegawa in Tokyo. Editor: John McCluskey, Nick Gentle.

To contact the reporters on this story: Shani Raja in Sydney at sraja4@bloomberg.net.

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net.

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Indonesia May Extend Interest-Rate Pause as Inflation Slows

May 11, 2011, 4:52 AM EDT By Shamim Adam and Manish Modi

(Updates with comment from central bank in 12th paragraph.)

May 11 (Bloomberg) -- Indonesia’s central bank will probably keep interest rates unchanged for a third consecutive meeting to support the economy, allowing gains in the rupiah to reduce inflationary pressures.

Bank Indonesia will keep its benchmark reference rate at 6.75 percent, according to all 10 economists surveyed by Bloomberg News. The central bank is due to release its decision in Jakarta tomorrow.

Indonesia has refrained from boosting borrowing costs since increasing the key rate in February for the first time in more than two years, in contrast with neighbors from Malaysia to India where officials have accelerated monetary tightening. President Susilo Bambang Yudhoyono’s policy makers have extended fuel subsidies and let the rupiah climb the most in Asia after Taiwan this year to contain imported inflation.

“There’s no strong reason for Bank Indonesia to raise rates this month and by holding, it will provide an opportunity for banks to give credit and that will boost economic growth for the rest of this year,’ said Eric Alexander Sugandi, a Jakarta- based economist at Standard Chartered Plc. “We’ve adjusted the timing of the next rate increase to August.”

The Indonesian rupiah climbed to its strongest level since 2004 this month and has gained about 5 percent this year, according to data compiled by Bloomberg. The central bank is allowing the rupiah to appreciate, Bambang Brodjonegoro, head of fiscal policy at the nation’s finance ministry, said last week.

Later Move

Bank Indonesia may not raise rates this week after inflation eased for a third month in April, Brodjonegoro said in Jakarta today.

“Maybe not tomorrow but later this year, especially when Bank Indonesia feels that inflationary pressure is high,” he said. “Until now we are able to manage the inflation, but at one point in time BI has to increase interest rates since other central banks in the region have increased interest rates a couple of times.”

Consumer prices in Indonesia, Southeast Asia’s largest economy, rose 6.16 percent last month from a year earlier, slower than the 6.65 percent pace in March. Prices fell in April compared with March. Core inflation accelerated to 4.62 percent from 4.45 percent.

Policy makers from Thailand to the Philippines and Singapore are stepping up the fight against inflation through rate increases or currency appreciation as political unrest in the Middle East boosts crude oil prices.

Malaysian Rates

Malaysia raised rates last week for the first time this year and asked banks to set aside more cash as reserves, while India boosted borrowing costs on May 3 for the ninth time since the middle of March 2010.

The pressure for Bank Indonesia to adjust interest rates is “not too high” even after core inflation accelerated in April, Governor Darmin Nasution said May 6.

The central bank sees a “probability” of “slight deflation” in May and even if consumer prices rise, the gains may be small, the governor said in Jakarta today. Bank Indonesia will maintain its “tight” monetary policy stance because of “inflation pressure” in the third and fourth quarter, he said.

Indonesia’s economic growth slowed to 6.5 percent last quarter as investment eased. Gross domestic product rose 6.9 percent in the previous three months.

Chance ‘Squandered’

The growth slowdown may not be enough to keep inflation from quickening in coming quarters as food and oil costs rise, straining the budgets of Asian governments that subsidize fuel and putting pressure on countries including Indonesia to raise prices for gasoline and diesel.

Oil traded at above $100 a barrel today, and has climbed about 13 percent this year.

PT Mandiri Sekuritas predicts April was probably the last time this year that consumer prices would fall month-on-month, according to head of research Ari Pitoyo.

“The chance for the government to raise fuel prices during ‘deflation’ months has been squandered, hence should the government have no option but to raise fuel prices, we might see inflation momentarily spike up,” Jakarta-based Pitoyo said.

He is recommending investors trim stocks of financial companies, which were hurt when the government raised fuel prices in 2005. Earnings at companies such as PT Mayora Indah, which makes biscuits and candies, and PT Unilever Indonesia, the unit of the world’s second-biggest consumer-goods company, may be affected should the government raise fuel prices, threatening discretionary spending, he said.

Bank Indonesia may face an “upside surprise” in inflation in July, with the beginning of the school year occurring close to the start of the Muslim fasting month, Wellian Wiranto, an economist at HSBC Holdings Plc in Singapore, said in a research note today.

“The dependence thus far on currency appreciation to curb inflation has had limited effectiveness given the predominance of domestic consumption in the economy,” he said. “Although Indonesia’s economy continues to hum on rather uneventfully, this does not mean there is room for complacency.”

--With assistance from Novrida Manurung and Suryani Omar in Jakarta. Editors: Stephanie Phang, Greg Ahlstrand

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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