Inflation Control: Cause for a Pause?

China had to find a balance between fighting inflation and economic growth, China’s central bank governor Zhou Xiaochuan (周小川) told an international economists’ conference at Tsinghua University on Friday, according to the BBC‘s Chinese website. China raised interest rates on Wednesday, for the third time this year. While China’s economic growth gradually slowed down, inflation remained high and reached its highest level in three years in June. There is no agreement among investors as to if – or how – Beijing should ease its tight monetary policies which have been in effect for nine months so far.

The actual data were published on Saturday, one day after Zhou’s comments. An updated Reuters report says that the consumer price index for June rose 6.4 percent from a year earlier, slightly above economists’ forecasts for a 6.3 percent increase, with sharp rises recorded in food, consumer goods and property. Reuters also adds details about how economists or investors disagree about the need for easing monetary policies.

China’s inflation-adjusted interest rates are still negative. That encourages  savers to funnel their money into other asset such as property instead of parking it in the bank, which can exacerbate price pressures,

Reuters quotes a GF Securities economist.

In other words, given inflation, saving – i. e. parking ones money in the bank – isn’t lucrative at all, while investment (or speculation) is hoped to remain profitable.

Yet on the other hand, more hikes in interest rates could leadd to an overdose. As concern for growth was rising, and global commodity prices were continuously falling, and given that U.S. rates were likely to remain near zero, further hikes on the Chinese side could lead to more hot money flowing into China, spelling additional inflationary pressures, rather than easing them.

Late last month, chief state councillor Wen Jiabao (温家宝) announced that China was unlikely to meet its inflation target of 4 percent for the year, but should be able to keep it within 5 percent. Wen had been more sanguine earlier in June, when he said that “price rises will be firmly under control this year”. The Diplomat‘s Jason Miks quoted IHS Global Insight’s China analyst Alastair Thornton as saying that a soft landing had been secured for 2011, but that structural problems were getting worse, hindering the medium-term outlook.

Since January, China’s National Bureau of Statistics has operated an adjusted weighting in the basket of goods it uses to calculate consumer prices. According to Germany’s daily Die Welt in February this year, Chinese bloggers had been quick to identify the move as the state’s new thermometer. Also in February, the National Development and Reform Commission decided to allow prices for gasoline and diesel to rise, even if to a measure below the actual market gains in crude costs, according to a Reuters report then.

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Related
» Monetary Policy 2011, Relatively Tight, December 6, 2010

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4 Responses to “Inflation Control: Cause for a Pause?”

  1. I have just read that assuming an inflation of 7,5% – 10% for Germany would be more accurate. The official statistics are a little to positive. I guess statistics all around the world mostly serve a certain purpose. As far as I can see inflation in China is a problem for the poor but are still in line with the budget. No one makes a big fuss this time. Three years ago people were angry. I don´t see this now. We will see.

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  2. Hard to compare. Germany’s and China’s consumption price indices are composed quite differently from each other, and definitions of core and overhead inflation differ, too. For most Chinese people, gasoline or diesel prices matter most in terms of bus tickets or the costs added to food prices by transport – sometimes across several provincial borders. That, however, doesn’t weigh in as much as a car owners gas station bill would.

    I do believe that our inflation numbers were distorted for some time during the SPD-Green coalition’s federal government, for some time after the introduction of the Euro. That in turn was possibly caused by the wrong “thermometer”, but the blame may be on the conversion rate on the day of the Euro introduction (much earlier than the corresponding paper money and coins in 2001). I’m not quite aware of the conversion rate history, but the finance minister Theo Waigel had apparently based his position on some inaccurate assumptions while negotiating the rate, in the 1990s.

    What can be safely said to date – the real time to calculate will be in January next year – is that Wen adjusted his inflation expectations by one per cent up, last month. We won’t know all the month-on-month and year-on-year data for another six months.

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  3. One more thing: when the National Bureau of Statistics in China publishes its latest numbers, there will be no month-on-month comparison at the old “thermometer’s” standards. You can be pretty sure that every television talkshow in Germany – let alone every financial column in a German newspaper – would operate both the old and the new standard, at least for another year – and rightly so. That’s the only way comparisons may make real sense.

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