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Wednesday 23 Aug 2017 | 16:28 | SYDNEY
Wednesday 23 Aug 2017 | 16:28 | SYDNEY

China's inflation problem

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COMMENTS

22 February 2008 12:10

As well as record high oil prices , international economy watchers have been paying attention this week to China’s climbing inflation rate. China’s annual rate of consumer price inflation rose to 7.1% in January, the highest rate for eleven years. The main cause of the surge in inflation was food prices, which were up 18% on the previous year. A big part of the story here is that China is currently in the middle of a classic hog cycle that has been exacerbated by last year’s outbreak of blue ear disease; pork prices were up 59%. The disruptions to transport and agriculture caused by the recent bout of severe winter weather also played an important role, while higher prices for energy and raw materials are pushing up production costs, with producer price inflation reaching a three year high in January. 

These inflation numbers are drawing attention for two reasons.

First, some China watchers fear that high food price inflation could trigger domestic instability. For example, this 2007 paper by Carnegie’s Albert Keidel judges that China’s current economic circumstances are similar to those that prevailed before the inflation shocks that hit in 1988-89 and 1993-96 and warns of the dangers of hardship and social unrest.  This special report by Fitchratings (registration required) takes a detailed look at inflation developments, and is much more sanguine about any possible social consequences. There is also an interesting debate as to whether China’s hitherto successful command and control style approach to economic management is up to the task of dealing with this inflationary breakout.

Second, after years of the rest of the world tending to view China as a disinflationary force in the international economy (thanks to its impressive ability to supply seemingly endless amounts of manufactured goods at low prices), there is a now an increasing focus on the possibility of the world’s factory turning into a new source of global price increases. In October last year, Time magazine predicted that China’s next big export to the rest of the world would be inflation. January’s data have no doubt reinforced such concerns.

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