Monday, February 28, 2011

Inflation in China

As a follow up to my post on consumer price inflation in the US here are trends in the last couple of years in China:

Credit: CEIC.

Whereas the US chart showed the levels of price indices this chart shows the rate of inflation. Inflation is China is currently at 4.9%. The fastest rising category is food, which has a much bigger budget share than the in the US, as is typical of developing economies. In contrast to the US, the cost of housing is rising quite strongly too. Inflation in China is not much of a surprise given the policy of undervaluing the RMB (relative to market equilibrium). This tends to be inflationary. One way of understanding things is that what matters is the real exchange rate not the nominal one. Though the nominal exchange isn't adjusting to make prices more equal in China and its trading partners the real exchange rate is adjusting through higher inflation in China than in the developed economies.

For more commentary on China, inflation, exchange rates etc see Michael Pettis' blog.

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