China’s Inflation Predicament – No Easy Way Out

August 9, 2011 10:10 am

China’s CPI (inflation rate) moved ahead of analysts expectations. The Chinese government has been tightening rates and reining in speculative property purchases as they have a very serious inflation problem. Remember, they dropped the mother load of stimulus two years ago that began a rapid expansion of the economy. The amount was so far out of line with anything that they had done before and the outcome has been uncontrollable speculation and inflation.

The concern is that China will be faced with a tough decision. Either they continue with their attempts to slow the economy and risk negatively impacting the global economy, or they can ease up until there is sufficient and sustainable growth from the global economies to resume their tightening measures. Neither is a solution that has an outcome which is positive.

If they continue to aggressively tighten, global growth will be effected and therefore result in lower exports. On the other hand, if they discontinue or pull back on their efforts, inflation will surely kick up, threatening the domestic and global growth outlook. Right now, China’s economic ministers are between a rock and a hard place.

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