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| Dangerous medicine |
| Edward Hadas / Mar 12, 2010, 00:42 IST |
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Chinese inflation: Inflationary days are back in China. Prices rose 2.7 per cent in February, compared to a year earlier, driven by food prices, which rose 6 per cent. In itself, that is not as worrying as it sounds. If China could keep to that kind of modest rate, the world might be better off. But inflation can easily run out of control.
China doesn't yet have the worst kind of inflation. Most of the reported increase in food prices came from temporary effects, such as bad weather in the north and New Year festivities, both of which wreak havoc on official numbers. Comparison also played a part — last year, the economic crisis sent prices lower.
Occasional wonky prices are a fact of life for China. But current monetary and economic conditions could cause them to spread. Money growth has been prodigious. And China's economy looks close to overheating. The first quarter's forecast GDP growth of 11 per cent is above the country's comfortable growth rate of 8-10 per cent. A little inflationary momentum might not be such a terrible thing. An overheating economy would put more money in workers' pockets, helping to increase private consumption, which most economists think accounts for an unhealthily small share of GDP. Inflation could also deter some of China's investment excesses by dampening anticipated returns.
There might even be a trade benefit. Higher costs within China would increase the cost of exported goods, which fell for most of China's buyers in 2009. This effective revaluation would be small, since the higher prices from inflation would be somewhat offset by lower costs from increased productivity. But trade partners would welcome anything that puts upward pressure on import prices.
Of course, the benefits of rising prices come with risks. Once system-wide inflation sets in, it is hard to control. China has only blunt tools to rein in rising prices. Cutting back bank lending, the option of choice, brings other unwanted consequences. Inflation is certainly coming, but it may be too much to hope that China gets the medicinal benefits without the habit-forming side-effects.
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