Houston Community News >> Chinese Inflation Could Infect World Economy

7/22/2007 -- A recent spurt in Chinese consumer prices has sparked concern that the trend could trigger a world-wide inflationary surge at a time of rising oil and food costs and upward wage pressures.

Driven by the food sector, Chinese inflation surpassed the preferred 3.0 per cent annual threshold over the past few months and came to 4.4 per cent in June.

But according to Nicolas Bouzou of the French research group Asteres, the actual inflation level in the flourishing Chinese economy could be higher.

"With growth of about 11-12 per cent a year and a very much under-valued currency, I have a hard time believing that Chinese inflation is only 4.0 per cent," he said.

At the Societe Generale bank, economist Veronique Riche-Flores noted that "while weak inflation in China in the past had acted as a brake on global inflation," the recent rise in prices there could exacerbate inflationary tendencies elsewhere.

Oil prices for the past several months have climbed steadily higher and are approaching record peaks reached a year ago, while prices for such staples as meat, milk, wheat and corn are also on the rise in response to demand in emerging market countries and in the biofuel sector.

With the world economy now in its fifth year of expansion, factories are fully utilised and unemployment is at its lowest point in years, particularly in the eurozone where upward wage pressures have emerged.

Addressing Congress last Wednesday, US Federal Reserve Chairman Ben Bernanke said the risk of higher inflation remained the "predominant" policy concern of the central bank.

He said hefty rises in food and energy prices had pushed up overall inflation and thereby eroded Americans' incomes, which he called "unwelcome developments."

But at the same time, he said, readings on "core" inflation excluding volatile food and energy costs and seen as a better indication of future price trends, have been "favourable."

Most economists do not see Chinese inflation, which largely reflects rising food prices, as a direct threat elsewhere, since the United States and the European Union import mostly manufactured goods from China. But there remains the possibility of a "second round" impact.

"If, in a dynamic economy that is creating jobs, you have a decline in purchasing power, there could be increased upward pressure on wages" that would then impact the prices of Chinese manufacturing exports, said Societe Generale's Riche-Flores.

But she added that such a trend would take six months to a year to be felt.

Bouzou of Asteres said the impact on world inflation would likely be limited to several tenths of a point.

But that prospect nonetheless is worrisome to investors, who fear that additional inflationary risks will cause a spike in long-term bond rates on which certain mortgage rates are based.

Long-bond rates in Europe are currently around 4.5 percent, up from 3.5 per cent a year ago, and recently exceeded 5.0 per cent in the United States.

As a result the real estate markets in the United States, Ireland, Spain and Britain, which had sustained economic growth, are now coming under strain. 

(Contributed by AFP)