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World markets flat, with rising inflation in focus

By Pan Pylas

Associated Press

Published: Tuesday, Feb. 15 2011 7:54 a.m. MST

LONDON — Further evidence of mounting inflationary pressures around the world kept stock markets in check Tuesday ahead of a raft of U.S. economic data later.

The state of the global economy has been the main point of interest all day, since China reported that its inflation rate hit 4.9 percent in January, up from 4.6 percent the month before. The increase was lower than the 5.4 percent predicted but analysts said that was largely due to technical changes related to the weighting of food in the overall measure.

With inflation a hot topic along with subdued economic growth readings, it's unsurprising that stocks in Europe have barely budged. The FTSE 100 index of leading British shares was down around a point at 6,059 while Germany's DAX rose 0.2 percent to 7,408. The CAC-40 in Paris rose 0.5 percent to 4,115.

Wall Street was poised for a fairly subdued opening too ahead of retail sales numbers for January and a closely-watched manufacturing survey for the New York region.

Dow futures were up 11 points at 12,235 while the broader Standard & Poor's 500 futures rose less than a point to 1,328.

Beijing has raised interest rates three times since October as it tries to dampen down on inflationary pressures and cool an overheating economy — that's a worry for investors around the world as the Chinese economy has been the main pillar of global growth over the last several years.

"Our guess is that the Chinese authorities will continue to tighten monetary policy gradually through a combination of interest increases, hikes in reserve requirements and restrictions on monthly lending quotas," said Neil MacKinnon, global macro strategist at VTB Capital.

As in China, Britain is witnessing big price rises on the back of higher energy and food costs. Its rate of inflation rose to 4 percent in January, double the Bank of England's target and the highest rate since November 2008.

While China's monetary authorities have already responded to rising inflationary pressures by raising borrowing costs, the Bank of England has done nothing, partly because the British economy contracted in the final three months of 2010.

However, if inflation doesn't show any signs of coming back to target, the Bank of England will be compelled to raise its main interest rate from the current record low of 0.5 percent. Its governor Mervyn King conceded as much in his letter to Britain's finance chief George Osborne to explain why inflation is running so far ahead of target.

"Our view this would not be a wise course of action," said Owen James, an economist at the Centre for Economic and Business Research. "Prices are currently being driven by elevated global commodity prices, accentuated by the ongoing disruption to oil supplies through Egypt, as well as the effect of weaker sterling, which makes imports more expensive."

The European Central Bank is also under pressure to start raising interest rates sooner than most in the markets were predicting just a month or two back. Like the Bank of England, it faces a difficult balancing act, of making sure the economic recovery isn't choked off too soon and inflation remains under control.

Figures earlier from Eurostat, the EU's statistics office, showed that the 16 countries that were using the euro at the end of 2010 — Estonia only joined in eurozone in January — grew by a modest 0.3 percent in the fourth quarter from the previous three month period.

The headline number masked big differences across the eurozone, with many of the core north European nations, including Germany, continuing to grow strongly, while the indebted economies of Portugal and Greece contract as their governments enact tough austerity measures to get a handle on their debts.

Earlier in Asia, Tokyo's benchmark Nikkei 225 stock average rose 0.2 percent — a 10-month high — to close at 10,746.67 while Chinese shares ended flat — the benchmark Shanghai Composite Index was virtually unchanged at 2,899.24, while the Shenzhen Composite Index edged 0.04 percent lower to 1,261.60.

Traders elsewhere in Asia were more cautious. Hong Kong's Hang Seng dropped 1 percent to 22,899.78 while South Korea's Kospi fell 0.2 percent to 2,010.52. Australia's S&P/ASX 200 slipped 0.1 percent to 4,931.

In the currency markets, the euro was 0.5 percent higher on the day at $1.3545 while the dollar was 0.3 percent firmer at 83.68 yen.

Benchmark crude oil for March delivery was up 30 cents at $85.01 a barrel in electronic trading on the New York Mercantile Exchange.

Pamela Sampson in Bangkok contributed to this report.

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