South-Western College Publishing - Economics  
Chinese Inflation Slows
Subject Chinese Inflation
Topic International Trade
Key Words

Inflation, Imports and Exports

News Story

Consumer prices in China rose in October, but at a less-than-expected rate. The increase was the lowest in any month since April. China's consumer price index rose 4.3 percent in October, after climbing 5.2 percent the month before. August and July both recorded a rise of 5.3 percent.

On the domestic side of the Chinese economy, a bountiful harvest affected inflation in general through slower increases in food prices while still increasing incomes for farm families. Ifzal Ali, the chief economist of the Asian Development Bank, described the slowdown in food price increases as a surprise, but also noted an increased emphasis on government policies aimed at increasing farmer's incomes. In the long-run, the increased incomes could lead to additional inflationary pressure.

On the international front, less pressure is coming from export demand as higher oil prices leave consumers in the U.S., Europe, and in other countries with less purchasing power to spend on the many manufactured goods that China produces in abundance--products including everything from wristwatches to microwave ovens. The Chinese ministry of commerce predicts that exports and imports together will rise only 15 percent next year after expanding 30 percent this year. If this happens, inflation should abate.

Tao Dong, an economist at Credit Suisse First Boston, says the slower increase in consumer prices may not be permanent. He says that while rising food prices are no longer a problem for Chinese consumers, he expects many will soon face rising prices for other purchases. He believes prices will start rising faster in a few months because of higher oil and commodity prices, higher utility charges for water and electricity, and higher costs for manufactured goods as the wages of migrant workers increase. "It's premature to call it a turning point; we're in a valley between two inflation drives," Mr. Tao said.

The real question for the rest of the world is whether China has succeeded in addressing the rapid growth in some sectors that have driven up world prices for industrial commodities like steel. Lower prices in China are good for the Chinese people, but removing the Chinese inflationary pressure from world markets would be good for the global economy.

(Updated January, 2005)

Questions
1.

What type of inflation is occurring when Chinese businesses have to pay higher charges for utilities like water and electricity?

2. What type of inflation is occurring when people want more Chinese exports?
3. Use a supply and demand diagram to explain how a bountiful harvest will lead to lower prices for food products.
Source Keith Bradsher, "Consumer Inflation in China Is Up, but Pace Slowed," New York Times Online, November 13, 2004.

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