Inflation in China exceeds 4%

China’s inflation has reached a two-year high, driven by growth in food prices, figures from the National Bureau of Statistics (NBS) show.

china.jpg

Data published by the organisation reveals that China’s consumer price index stood at 4.4% in October, above the previous estimates of 4%, and is expected to increase further in the months ahead.

Food prices increased by 10.2% in October, while the cost of non-food items rose by 1.6%. The only commodity areas that showed falling prices were clothing and transport & communication.

October’s inflation rise also makes it clearer why the People’s Bank of China (PBC) announced a 50 basis point increase in the required reserve ratio for the country’s banks.

Capital Economics notes that, while the PBC could simply be responding to the growth in trade surplus that was recently reported, the institution may be signalling to banks to reduce their lending and reminding the wider economy that it remains committed to policy tightening. (article continues below)

Analysts at the NBS suggest that the quantitative easing strategies of other countries, most notably the Federal Reserve’s QE2 programme, are forcing up prices in China.

Prices in the global commodity market rebounded strongly this week when the Fed confirmed it will undertake a further asset purchase programme. This is especially relevant to China, as its economy is largely driven by commodity spending.

Julian Jessop, the chief international economist at the Capital Economics, claims that the commodities, especially agricultural commodities and industrial metals, are the most likely locations to find bubbles.

While this may increase the likelihood of more spikes in the China’s inflation in the short-term, the bubble’s bursting would lead to a welcome cooling of inflationary pressure.