Global increase in cotton prices

For the last months, we have been experiencing a heavy rise in cotton prices, which have already hit a 140-year high.

The main reasons for this global shortfall that has pushed the prices up so much are a string of bad harvests and the high demand for this commodity from fast developing countries like China and India.

This sudden and unexpected rise in prices has alarmed many retailers and manufacturers in the apparel industry who are worrying about being forced to push prices up in times of weary consumers due to higher production costs.

Another concern that is talked about due to this rise in cotton prices is the dollar. The “paper” bills are actually made up to 75% of cotton (and 25% linen). Money printers all over the world are therefore facing higher production costs as the cotton prices have been rising for the last year. In 2010, the production costs of the dollar bills leaped to 50% from 2008 (currently at 9.6 cents)

This even comes to the point where there is talk about producing $1 dollar coins, which would be more durable and do not need to be replaced as often. 

China interest rates

In the last months, the Bank of China has surprised investors globally by raising interest rates. On October 20^th, it raised key rates for the first time since it cut rates in December 2008.

Since then, the Bank of China has raised the rates a second time, announced on December 22^nd increasing its benchmark deposit rate to 2.75% and the one-year lending rate to 5.81%.

Why?

The main reason for this sudden increase in rates was to keep inflation under control, which has shown an increase over the last 8 months. The consumer price index rose 5.1% in November, reflecting this inflation.

China’s economy has been rising steadily at an average rate of 10% even with the current recession, which in turn also fuelled the economic engine and drove prices up.

This increase in interest rates indicated that China is determined to fight against stubborn inflation, soaring house prices and a floating economy that is pumping out exports and accumulating huge amounts of foreign exchange reserves.

What effect does it have?

China’s raise in interest rates took many investors by surprise and has had a big effect on global economies.

First of all, the change in these rates caused many investors to assume that China could slow and crimp global economy. This meant that many investors lowered their expectations on the second largest economy and removed bets on raising economies like China itself. This pushed the dollar up since money flowed back to the USA.

However, a decrease in other currencies could be seen as the Euro, the Australian dollar and others went down. The Chinese Yuan decreased in value.

Another effect of this change in interest rate is on the stock market. Now, as interest rates rose, the Chinese banks presented a new method for saving money that had before not been so attractive. The new alternative to saving money affected stocks as the Chinese demand decreased. the Dow Jones Industrial Average lost 1.5% to close at 10978.62 after the first increase in the rates

Chinese demand plays a great role in setting commodities prices. The prices of commodities, therefore, went down. Oil prices suffered their biggest decline in eight months, losing more than 4% to $70.49. Gold fell 2.63% to $1335.10 after having set a record high the week before.

Inflation

Inflation is a rise in general prices of goods and services in an economy over a period of time. Each unit of currency buys fewer goods and services. Inflation erodes the purchasing power of money. There is a loss of real value in the value of exchange.

Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum. 

Inflation is usually caused by demand and the amount of money people have at their disposal. Inflation encourages people to spend rather than save, which only pushes the prices higher again.