Inflation rates are watched closely by analysts and market makers as they affect what policymakers decide to do with monetary policy1. Lower inflation is positive for an economy since it allows policymakers to loosen monetary policy. Lower interest rates raise demand by increasing the availability of money in the economy. Higher demand points to higher trade volume, which is positive for shipping companies.
For January 2013, China’s inflation rate eased to 2.0% according to the National Bureau of Statistics of China. This is lower than the 2.5% reported during the previous month. Analysts have raised concerns earlier concerning the higher inflation rate due to an abnormally cold winter in China; many feel it may be a risk to the recovering global economy. January’s 2.0% is lower than the previous month’s figure partially because last year’s Chinese New Years occurred in January. This year, it is held in February.
While analysts have suggested the possibility of a high inflation hurting an on-going global economic recovery, the probability is low. For 2013, the government has set 3.5% as the target for inflation. Historic data has shown that inflation rates have gone above 4% before monetary policies were tightened to cool price appreciation in China. Thus, January’s 2.0% year-over-year increase in price leaves enough room for the government to relax monetary policy, if the economy does falter.
The ability of the government to implement looser policies supports the shipping industry as it is highly dependent on China. Although investors should look out for February’s inflation rate, as the Chinese hold their New Years celebrations, current data is favorable for shipping firms such as Diana Shipping, Inc. (DSX), Teekay Corp. (TK), Navios Maritime Holdings, Inc. (NM) and Ship Finance International Ltd. (SFL). This is also encouraging for the Guggenheim Shipping ETF (SEA), which invests in leading shipping firms worldwide.
- Activities that central banks engage in to cool or heat up economies by changing the money supply through changes in interest rate or capital reserve requirements ↩