Tuesday, November 13, 2007

Chinese economy now exporting inflation

For the last decade, China exported cheap goods that kept inflation rates elsewhere down. Now, the Chinese economy is heating up and inflation is rising. Prices are now increasing 6.5 percent; a faster rate than at any time during the last 11 years.

Some of the CPI sub-categories are increasing at double digit rates. Food prices are up 17.9 per cent, with pork up a shocking 54.9 per cent. Fresh vegetables rose 29.9 per cent while eggs are up 14.3 per cent.

In recent months, the chinese central bank has tried to choke off price rises by raising rates and trying to hold back credit growth. Already this year, the central bank increased interest rates six times and raised the proportion of deposits banks must hold in reserve nine times to an all-time high of 13.5 per cent. However, these measures have done little to hold back inflation. Prices just keep on going up.

Higher prices in China will inevitably lead to higher export prices. Eventually, Chinese inflation will spread out across the world, reversing the process that kept world inflation in check during the first half of this decade.