High inflation puts China under global scrutiny

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: World over inflation fears have dominated headlines in the last few months. China has seen the commodity price index (CPI) rise to highest level seen in decades. India is witnessing inflation rate upwards of 7% that is the highest seen in three years.

Unaffordable food prices and consumer inflation have resulted in severe civil unrest and even governments being toppled in the past. In April, Haitian PM Jacques Edouard Alexis was ousted amid protests over soaring food prices. The UN estimates food prices by this march have surged by 57% globally from a year earlier. Inflation in Zimbabwe soared to 164,900% in February this year as shortage of wheat and other goods pushed the price of bread loaf to $650. Three women in China were trampled to death last November in their endeavour to grab the discounted cooking oil in a supermarket, price for which has increased by 50% in last one year. Meanwhile, Chinese surpassed France and UK as the world’s fourth largest economy with GDP growth rates averaging 10% in the past five years.

The Indian government puts fighting inflation as its highest priority even at the cost of economic growth. The Bank of England recently announced a freeze on further interest rate cuts until 2010 to combat inflation in spite of the dire need to inject liquidity in the face of severe credit crunch and falling house prices.

Resurgent inflation, everyone agrees, seems a global problem while a slowdown, may be largely limited to US with some spillover effect to Europe. A closer look might reveal stark differences in the nature and composition of inflationary risks faced by developed and emerging markets. China, which is an undisputed manufacturing factory of the world, is being closely scrutinised.

China exported deflation for the last 15 years by stocking the shelves of retailers in the West with products made in their factories employing cheap labour and easy capital. Chinese imports constitute 7.5% of spending by Americans on consumer goods, but they make a higher share of categories such as toys, foot ware and clothing.