China’s inflation climbs to 8.5% - Times Online

Imagine how it feels here in China! Food prices are the main driver of overall inflation here. There appear to be both supply and demand factors at play. While the ever-growing middle class consumes more and more resource intensive meat, input costs are forcing producers to restrict their output and pass higher costs onto consumers:

Overall food prices increased by 22.1 per cent in April from a year earlier, while the price of pork, the most popular meat for most Chinese, was up 68.3 per cent over the same period.

Wen Jiabao, the Chinese Premier, said in March that the government wanted to keep inflation at 4.8 per cent this year.

The bureau said in a statement today: “Growth in consumer prices remains high. At the moment, we must pay close attention to future price trends and prioritise the control of price increases and inflation even higher.”

“It is linked to the fact that the international prices of primary products, and especially grain prices, continue to rise, impacting domestic food prices,” it said.

So rising global commodity prices increase costs to food producers here in China, who pass these higher costs onto consumers. But at the same time, the demand-side has seen ever increasing consumption of pork, beef and chicken, which historically were delicacies enjoyed only by China’s elite. With a middle class of around 300 million, today these meats are staples of the masses, come to be considered a normal part of the urban Chinese diet.

To compound inflationary pressures in China, net exports are expected to remain strong or even grow as China’s trading partners face inflationary problems of their own. Rising prices in the US and Europe make still relatively cheap Chinese imports more attractive to these foreign consumers, putting even more upward pressure on China’s price level as demand for its output remains strong abroad.

Premier Wen Jiabao says the government’s target inflation rate is a moderate 4.8%, but with three consecutive months of greater than 8% inflation, this now seems like an unlikely goal for China. The biggest threat inflation poses to the Chinese Communist Party is the undermining of the gains enjoyed by the average Chinese consumer from the 10% average nominal GDP growth the country has enjoyed for most of the last 30 years.

With inflation approaching double digits, much of the nominal income gains resulting from rapid GDP growth are eroded and the real effect of inflation may feel more like economic stagnation to the average Chinese worker. With its legitimacy hinging on continued improvements in economic well-being, the CCP has much to worry about with 8.4% inflation. Contractionary measures are needed to stabilize prices, perhaps even at the expense of continued growth.

About the author: Jason Welker is a teacher at Zurich International School in Switzerland, where he teaches Advanced Placement and International Baccalaureate Economics. Jason was an international school student in Malaysia before studying economics at Seattle University then earning his Masters in Education. He calls Seattle and Northern Idaho home. In addition to maintaining an economics wiki and this blog for economics student and educators, Jason also gives presentations on using Web 2.0 tools in education at workshops and conferences around the world. His economics wiki won the 2007 "Best Educational Wiki" award from the "EduBlog Awards".

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