Consumer Inflation Knocks at China’s Door


fears are spreading in China with expectations for an economic recovery. Sentiments have been on a roller coaster ride since the economy turned sharply from inflationary in the first half of 2008 to deflationary in the first half of this year. And if steep re-emerges in the first half of next year, resource allocations will be distorted and the economy damaged.

The fears may be justified. If the nation’s GDP growth rate hits double digits, and the current flood of excess liquidity is not curbed within 12 months, CPI may rise by more than 5 percent per month next year.

China’s current liquidity levels are unprecedented, laying a foundation for steep inflation. A lesson from the past is that consumer and asset price inflation always follow increased liquidity levels.



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