Inflation remains unchecked as consumption soars
- By Tylor Claggett
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China.org.cn, June 22, 2011
In my December 2010 column for china.org.cn, I warned against the evils of inflation in China using the back drop of the then recently published inflation rate figures of 4.1 and 5.1 percent in October and November of that year. Here we are six months later, and China's inflation has only accelerated.
In May, the rate was 5.5 percent, up from April's 5.3 percent and exceeding March's 32-month high of 5.4 percent. Even more troubling is the embedded 11.7 percent increase in food prices. The reader should bear in mind that these numbers are annualized figures. Nevertheless, they are shocking when one realizes the average Chinese spends about one-third of his or her income on food.
Years of drought in many parts of China have all but eliminated the winter wheat crop and adversely affected other agriculture sectors from aquaculture to dairy operations. In addition, China has just become the world's greatest user of energy in absolute terms. (The US still uses more oil and much more energy per capita than China.) China has a rapidly growing middle class that is using much more energy than ever before. In 2009, almost 14 million new cars were purchased in China and, just recently, China passed the US to become the world's largest auto market.
Due to soaring car ownership, China now uses about ten percent of the world's oil or about 9 million barrels of oil a day – up from less than 8 million barrels in 2007. The country is expected to use 15 million barrels of oil in the not too distant future. Today, many of the world's oil fields are mature with declining production. Political turmoil in Libya and parts of the Middle East plus normal supply and demand mismatches have contributed significantly to higher world oil prices. High energy prices, for any prolonged period, inevitably find their way into the prices of almost all goods and services; especially those requiring substantial energy for production or transportation to markets. There is little doubt that this has affected Chinese consumers.
Perhaps the greatest cause of inflation in China has stemmed from the government's efforts to ward off the ill effects of the 2008-09 global financial crisis. China's fiscal stimulus package was estimated to be three times the size of the US's as a percentage of GDP. Furthermore, China's central bank continues to buy foreign currency-denominated investment vehicles, pumping billions of surplus Yuan into its economy. Although these policies benefits China's export-driven economy by keeping the Yuan weak against other currencies, they are highly inflationary at home.
It may sound passé, but in China, the current inflation problem is a case of too much money chasing too few goods. The causes of inflation are easy to identify, but admittedly difficult to correct.
The author is a columnist with China.org.cn. For more information please visit: http://www.formacion-profesional-a-distancia.com/opinion/node_7078635.htm
Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.
