South-Western College Publishing - Economics  
China’s Inflation on the Rise Again
Topic Comparative Economic Systems
Key Words

Inflation and Inflation Controls

Full Article

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Reference ID: A167547129

News Story

One of the dangers of a rapidly growing economy is inflation. This is happening now in China as the inflation rate has pushed past its previous peak of 5.3 percent reached in July of 2004. In response to that earlier inflationary crisis the Chinese government imposed rather drastic measures to stop the rise of prices.

The government actually jailed some local officials who allowed large construction projects to go forward without central government approval. The reason being, the unapproved expenditures added fuel to the inflationary fires. They also introduced price controls as an administrative measure of keeping prices from rising. Although not a cure the price controls do temporarily stop the rising prices and solidify consumer buying power. Finally, the response in 2004 included government mobilization of thousands of workers for emergency projects that would expand overburdened ports and reduce the existing shortages caused by the lack of infrastructure.

Now, three years later inflation has reared its ugly head again but the government’s response is much more subtle. The overall inflation rate has climbed to 5.6 percent but the main source of the inflation is food prices. Led by meat prices, consumer prices were up 15.4 percent. The real mystery is why inflation in 2007 has been mostly confined to food. If you take food out of the calculation inflation is only 0.9 percent in July compared to a year earlier.

Given the rapid growth of the Chinese economy economists remain divided and somewhat perplexed by how inflation has been contained in the rest of the economy. With a growth rate that many forecasters consider unsustainable at around 12 percent some predict that prices will begin to rise soon for a much broader range of products.

So far, however, the government response is limited to a gradual increase in interest rates and an increase in the reserve ratio which dictates what percentage of certain bank assets must be held in reserve with the central bank. The government has resisted trying to shock the economy into slower growth by sharp interest rate increases or by severe administrative controls.

Although China has so far avoided the bottlenecks that caused inflation to soar in 2004 many analysts expect broader inflation to come to China in the near future. They point to a brisk increase in the money supply last month by the central bank. The result of this increase in the money supply could lead to the old economic adage of too much money chasing too few goods. The inevitable result of this scenario is an increase in the consumer price index.

“In our view, inflationary pressures will remain high in the coming months, and we see significant upside risks to our current C.P.I. forecast.” said Liang Hong, an economist with Goldman Sachs.

Questions
Discussion Questions:
1.

Why do you think a lack of infrastructure such as ports, railroads, and highways can influence inflation?

2. Use any source available to comment on the success of price controls to combat inflation.
Multiple Choice/True False Questions:
1. China’s current inflation is found mostly in the energy sector.
  1. True
  2. False
2. According to the article, the current inflation in China is not as high as in 2004.
  1. True
  2. False
Source Keith Bradsher, “Surge in Consumer Prices Stirs China’s Concern About Overheated Economy,” The New York Times Online, August 14, 2007.
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