Thursday, February 21, 2008

Inflation in China 2008

We have become so accustomed to hearing remarkable stories about Chinese economic growth, that it becomes tempting to assume this is something that will continue forever. However, the increasing rate of Chinese inflation, could suggest that the economy is perilously close to entering a boom and bust economic cycle. This would be disastrous for an economy already struggling with disguised unemployment and rising inequality.
Recently Chinese inflation rose to 7.1%; mostly caused by rising food prices.

In this short post, I examine what China needs to do to avoid inflation getting out of control.
Although Unemployment is a problem in China, I don't feel the long term solution is to enable the economy to grow too quickly. Whatever the problems in the agricultural sector, the first priority should be to provide a framework of low inflation. If this means reducing economic growth from 10% to 8%, then that is fine.

The problem with the Chinese economic growth is that increased living standards have only been achieved by a certain proportion of the population. The rise in inequality could possibly spark social unrest as the gap between the haves and have nots increases.

The food inflation is particularly a problem because it hits the poorest hardest.
The Chinese government face the difficult, although not impossible, challenge of redistributing the fruits of economic growth. To do this it may require a new strategy for dealing with the declining agricultural sector

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