Article Index

Inflation

Question of the Week: Readers Respond to Money Morning's Question on China's Currency

After months of intense political pressure, China last week announced that it would allow its currency to gradually appreciate against the U.S. dollar. China's currency - the yuan - has been pegged to the American greenback since 2008.

"This is going to lead to a transition from export-lead, investment-lead to more of a consumption-lead economy going forward," Jing Ulrich, chair of China equities and commodities at JPMorgan Chase & Co. (NYSE: JPM), told CNBC. "I think the ramifications are profound not just for the next few months but actually for the coming years."

Not surprisingly, U.S. exporters embraced the news as an opportunity to compete against Chinese companies and to reduce the U.S. trade deficit. Foreign nations, including the United States, have accused China of undervaluing its currency to give its exporters an advantage in global trade.

Chinese domestic consumption stands to benefit the most, as consumers will have more purchasing power on top of China's recent wave of multi-industry wage increases. Western companies that reach out to Mainland China can access a consumer base with more money and an increased desire to spend, which should give Western investors a chance to cash in on climbing profits.

However, not everyone will see immediate benefits from the new currency policy. In fact, the combination of big double-digit wage increases in China and an increase in the yuan will reanimate inflation.

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We Want to Hear From You: Are You Worried About China's Currency Rise Sparking Inflation?

After months of intense political pressure, China announced Saturday that it would allow its currency to gradually appreciate against the U.S. dollar. China's currency - the yuan - has been pegged to the American greenback since 2008.

"This is going to lead to a transition from export-lead, investment-lead to more of a consumption-lead economy going forward," Jing Ulrich, chair of China equities and commodities at JPMorgan Chase & Co. (NYSE: JPM), told CNBC. "I think the ramifications are profound not just for the next few months but actually for the coming years."

Not surprisingly, U.S. exporters embraced the news as an opportunity to compete against Chinese companies and to reduce the U.S. trade deficit. Foreign nations, including the Untied States, have accused China of undervaluing its currency to give its exporters an advantage in global trade.

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Why China's Foxconn Will Hurt the Global Economy More Than the BP Oil Spill

Before this month, chances are pretty good that you'd never even heard of Taiwan's Foxconn International Holdings (PINK ADR: FXCNY). And yet, Foxconn is one of the world's most important manufacturers.

Given that the formerly anonymous giant is now at the forefront of the zooming escalation in labor costs that's currently taking place in Mainland China - and given the enormous implications of the inflationary pressures that will result - chances are excellent that Foxconn will have a bigger effect on the world economy this year than even BP PLC (NYSE ADR: BP).

If that weren't enough, China's decision to let the yuan appreciate against the U.S. dollar will actually magnify this impact: If the Chinese currency strengthens, then the yuan-denominated wage increases will have an even-more-inflationary effect on the cost of China-made goods selling at your local Wal-Mart (NYSE: WMT).

To understand the "Foxconn Effect" - and to see how to position your investments - please read on...

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China's Inflation Higher Than Target Rate, Could Be a Sign It's Time to Tame Rapid Growth

China's inflation rate rose 3.1% in May from a year earlier, exceeding the government's 3% target rate for 2010 and stirring speculation on whether or not Beijing will attempt to slow the nation's rapid growth pace.

The consumer price index climb was the fastest in 19 months and was higher than the 2.8% rate in April. The National Bureau of Statistics also posted increases in industrial production, retail sales, and property prices, which contributed to analysts wondering whether or not China will make moves to tame growth to avoid higher inflation.

"Officials seem confident that price pressures will ease later this year, attributing much of the recent positive trend to base effects, but there are plenty of reasons to think that inflation can keep moving higher," Royal Bank of Canada (NYSE: RY) economist Brian Jackson told The Wall Street Journal.

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These Five Inflation Plays Will Provide Protection and Profits

Inflation hawks have been warning since 2008 that the spurt of U.S. money creation that began at the end of that year would spark a surge in consumer-price inflation.

And yet the consumer price index (CPI) statistics remain quiet - not giving ammunition to the deflationary camp, but making "inflationists" look silly, as well. Now, however, it is becoming obvious that inflation will soon arrive. But this time it is sneaking in through the back door - courtesy of our emerging-market trading partners.

Fortunately, there are some very clear steps that investors can take to protect themselves from this expected inflationary surge.

To learn about five investments that can battle inflation even as they fatten your portfolio, please read on...

With Economic Turmoil and Inflation on the Horizon, Higher Gold Prices Lie Ahead

The gold bull is unstoppable.

Gold prices are up fourfold since 2001 and hit a new record high near $1,250 an ounce on May 14. But they're still nowhere close to finished.

In fact, another four-fold increase could be in the cards.

"It sounds like a gold bug's dream," Money Morning Contributing Editor, Martin O. Hutchinson said in a May 13 Reuters BreakingViews column. "But looking back to the last inflation-adjusted peak price in 1980, it's far from impossible that the gold price could soon go above $5,000."

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U.S. Treasury Bonds: The Not-So-Safe "Safe Haven"

In the last few weeks, international investors spooked by the budget crisis in Greece and the turmoil in southern Europe have been flocking into the U.S. Treasury bond market as a "safe haven."

The huge resulting funds flows have pushed the 10-year Treasury bond yield down to 3.16%, very little above its level during the crisis of October 2008. To a rational investor, this is extremely peculiar: After all, what on earth is safe about the "haven" of long-term U.S. Treasury bonds?

To learn about the potential investment dangers posed by U.S. government debt, please read on...

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Gold Prices Surge and Will Keep Climbing as Investors Protect Against European Debt Crisis

Gold prices yesterday (Wednesday) broke through to a record high, as investors feared the Eurozone bailout plan would debase the euro and escalate inflation.

Gold for June delivery continued its record-breaking Tuesday climb to hit $1,243.10 an ounce Wednesday. The contract reached an intraday high of $1,249.20 an ounce. Spot gold prices hit $1,244.45 an ounce, up almost 20% in the past three months.

Gold's reputation as a "safe haven" investment causes the metal's price to move inversely to investor confidence, which has been rattled by the Greece debt crisis and last week's 1000-point plunge in the Dow Jones Industrial Average.

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How the Greece Bailout Turned Gold Into a 'Must-Have' Investment

With so much uncertainty in the U.S. stock market - not to mention the debt-contagion concerns emanating from Greece and other European Union (EU) countries - it's more important than ever for investors to hold "hard assets," such as gold and other commodities.

In my view, what's happening in Europe is particularly important for investors to be aware of and understand. The so-called " shock-and-awe" bailout strategy undertaken by the EU and the International Monetary Fund (IMF) - which establishes a $1 trillion rescue package for member-countries facing financial crisis - will not be the answer.

To see how gold and other hard assets are becoming "must-have" investments, please read on...

To see how gold and other hard assets are becoming "must-have" investments, please read on...

Question of the Week: Readers Respond to Money Morning's Corporate Profits Query

Corporate profits returned in full in the first quarter of the year, with company after company topping Wall Street estimates.

JPMorgan Chase & Co. (NYSE: JPM) raked in $3.33 billion in first-quarter net income. Ford Motor Co. (NYSE: F) beat analysts' estimates with a $2.1 billion profit. Apple Inc (Nasdaq: AAPL) brought in $3.38 billion.

"There is clear and broad-based improvement in the economic factors in the United States and around the world," said JPMorgan Chief Executive Officer Jamie Dimon. "It appears to be strengthening, not weakening. It is possible that they will strengthen enough to end up with a strong recovery."

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China Manufacturing Data Could Presage a Rising Yuan

Manufacturing activity in China and much of Asia continued to expand in March, underscoring the region's role as a driving force in the global economic recovery.

China's official Purchasing Managers' Index (PMI) rose to a seasonally adjusted 55.1 from 52 in February, according to Li & Fung Group, a Hong Kong-based company that releases data for the Federation of Logistics and Purchasing. It marked the 13th straight month the index showed expansion and was in line with the median estimate in a Bloomberg News survey of 13 economists. A reading above 50 indicates growth.

Another PMI for China released by HSBC Holdings PLC (NYSE ADR: HBC) was even more positive, showing a rise to 57.0 in March from 55.8 in February.

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With Inflation Accelerating Around the World, Will the United States be Next?

Inflation is now thoroughly entrenched in India's economy, and some analysts fear that the United States could suffer the same fate if adjustments to monetary policy aren't made soon.

India's wholesale price index-based inflation rate in February accelerated to 9.89% from a year earlier. That was the fastest pace in 16 months, blowing past the Reserve Bank of India's (RBI) estimate for an 8.5% inflation rate at the end of March.

Soaring food prices were the primary driver of inflation. An index measuring wholesale prices of lentils, rice, vegetables and other food articles compiled by the commerce ministry rose 16.3% in the week ended March 6 from a year earlier after a 17.81% gain the previous week.

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Producer Price Index Drop Supports Fed's Position on Keeping Low Interest Rates

The Producer Price Index (PPI) saw its biggest drop in seven months in February, fueling the U.S. Federal Reserve's argument that interest rates can remain low "for an extended period" without yet facing dangerous inflationary pressures.

Wholesale prices were down a seasonally adjusted 0.6% in February, the Labor Department reported today (Wednesday), a day after the Fed's one-day policy meeting where it reiterated the need to encourage economic growth through low interest rates.

The central bank's position to keep the federal funds rate at a record low range of zero to 0.25% since December 2008 has sparked inflation concerns among many investors. However, proof of tame inflation buys the Fed more time in deciding when to continue with its "exit strategy" and pull the trigger on a rate hike. The Fed has remained firm on its stance that there is no evidence of rising inflation due to low interest rates.

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Will Obama's "Soft Money" Fed Lead to Hard Times for the U.S. Economy?

For a U.S. president, nominating Fed governors is a little like nominating Supreme Court justices: Since they serve a 14-year term, you have the chance to shape the U.S. Federal Reserve for a decade after your administration ends. What's more - even though Fed governors are subject to confirmation by the U.S. Senate - you're far less likely to have trouble getting them through than you do with the Supremes.

That's why U.S. President Barack Obama's current chance to nominate three out of the seven Fed governors is legitimate front-page news - and isn't merely the "inside monetary baseball" trivia that occupies much of the daily business section. Probably two of those three governors still will be serving in 2020, long after President Obama has published his memoirs.

The bottom line: One of President Obama's legacies will be a "soft money" Fed.

To discover the dangers of a "soft money" Fed, read on...

China's Exports Surged by 46% in February, Adding to Currency Pressures

China exports in February rose for the third month in a row, beating forecasts and putting added pressure on government officials to rein in stimulus spending and loosen currency policies. Exports in February jumped 45.6% from a year earlier after a 21% advance in January, the customs bureau reported today (Wednesday) on its Web site.  […]

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