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Monday, August 13, 2007

Inflation Creeps Up in China

Inflation in China is ticking up (as we can see from the chart below). In fact China’s inflation rate hit a ten-year high of 5.6 per cent in July, producing a spike which has raised expectations about further tightening measures as well as increased concerns there might be an eventual knock-on impact on the real economy.

On the other hand, as the Financial Times notes:

The rise in the consumer price index was mainly the result of higher food prices, a result of a shortage of staple meats, especially pork, following an illness which killed millions of pigs late last year, and higher feed costs.

So I think we need to be very careful before coming to any over hasty conclusions. If we look at the producer price situation for manufactured goods (see chart below), we find that, in July, the Producers’ Price Index (PPI) for manufactured goods up by 2.4 percent from the same month last year. At the same time the purchasing prices for raw material, fuels and power rose by 3.6 percent. So while there is cost pressure from inputs, there is no sign of these producing sustained inflationary upward pressure on producer prices yet.

So while the People’s Bank of China has been sounding more and more hawkish about inflation of late, and especially in its last quarterly monetary report, we still need to wait and see to what extent this passes through to monetary tightening, and even in the event that it does, to what extent - given the overarching liquidity background - to what extent this passes through to impacts on the real economy.

I cannot help feeling that what is going on in the financial markets and the international banking sector right now will be much more significant for determining the future Chinese growth path.

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