Inflation has the potential to become a serious economic and political problem in China. Not only does it raise living costs for ordinary people, it can also leave them earning negative returns on the very high level of savings (about 30 per cent of disposable income) in deposit accounts. That’s why it’s so important to assess just how high inflation will be this year, and how China’s political leaders will respond.
In my view the problem is not very serious, and the policy response will be moderate. Yes, China will have to become accustomed to a slightly higher level of structural inflation in the coming years. But rapid growth in income and GDP means a crisis in the consumer price index is not looming.
The primary driver of CPI inflation in 2010 was bad weather, which led to a sharp fall in fresh vegetable and fruit supplies. As a result, food accounted for 74 per cent of the 5.1 per cent year-on-year CPI rise last November. Fresh fruit and vegetables alone contributed almost one-quarter of all of China’s inflation in that month.