Fears that China might export inflation to the rest of the world were heightened this week when Beijing announced the sharpest rise in the cost of living in 11 years.
With food prices rising rapidly following severe new year storms, the annual inflation rate in the fast-growing developing economy reached 7,1% last month.
Food prices were up 18% on January 2007 as blizzards took seven million hectares of agricultural land out of production and paralysed distribution systems across China.
Beijing released food stocks to ease shortages, but was unable to prevent prices from rising sharply. Even before the storms inflation was steadily increasing in China, up from 2,2% in January 2007. Analysts said further increases were likely over the coming months, putting pressure on the authorities to tighten economic policy.
Deutsche Bank said inflation could hit a peak of 8% for the first quarter, while Lehman Brothers forecast price rises of up to 7,5% in February before the surge ends in March.
Stephen Lewis, economist at In-singer de Beaufort, said there were clear signs that price rises were spreading from food to the rest of the economy and that this had implications for countries that import Chinese goods. “It has now received wisdom that, over the past decade or so, the expansion of China’s international trade acted as a disinflationary influence in importing countries,” he said.
“The fear now is that a faster rate of Chinese domestic inflation will be reflected in an upturn in the prices of goods China sells abroad. In short, China will export its inflation to the rest of the world.”
Cheap manufactured goods from China have been seen as a significant factor in holding down global inflation in the past 15 years, but the need to power an economy growing at 10% a year has led to rising commodity prices. Labour shortages and the demands of a richer population have led also to more expensive food and exported goods.
High inflation could complicate Beijing’s efforts to keep the fast-growing economy from overheating and add to pressure to let the exchange rate of its currency, the yuan, rise faster. China’s economy grew 11,4% in 2007 and is expected to expand at least 9% this year.
Surging food costs are a political concern for Chinese leaders because they hit the poor majority hard in a society where families spend up to half their incomes on food. Bouts of high inflation in the Eighties and Nineties led to protests. — Â