Tuesday, July 24, 2007

Blame the Chinese for Inflation?

Highly amusing headline: The Latest Chinese Export May Be Inflation. Actually this is a smart article, by Bloomberg's Simon Kennedy and John Fraher, in spite of the flippant headline. It paints a picture of inflation as the product of years of out-of-balance globalization. Now the global economy is slowly and inevitably re-balancing:
Central bankers have harnessed the effects of low-cost production from China and other countries like India to hold down interest rates and stimulate domestic growth. The Organization for Economic Cooperation and Development in Paris estimates that globalization knocked as much as 0.2 percentage point off inflation in rich nations from 2000 to 2005, even as the world economy sped up and buoyed raw-material costs.

Now, when "inflation is above target, the cost of reducing it has been increased," said Robert Lind, chief economist at ABN AMRO Holding in London. Interest rates in Britain and the 13-country euro zone are already the highest in six years, with officials hinting that more changes may be on the way.
China is actually struggling to keep it's own economy under control, and is raising interest rates:
China reported the quickest pace of growth in a dozen years, pushing inflation to 4.4 percent in June. On Saturday, China raised its benchmark interest rate to an eight-year high of 6.84 percent.
Kennedy and Fraher give examples of central banks struggling with inflation not only from China, but also from Britain, New Zealand, and Canada.
The Bank of England's policy makers highlighted import prices as a "growing" inflation risk and one of the reasons for this month's increase in the benchmark rate to 5.75 percent.

It is not just the cost of imported goods that troubles Mervyn King, governor of the Bank of England. On May 16 he said that British house prices were "heavily influenced by what is happening overseas, independent of U.K. monetary policy," as wealthy foreigners purchase property.
New Zealand:
Bollard, of the New Zealand central bank, is expected to raise the official cash rate to a record 8.25 percent this week, in part because overseas orders for butter and milk are pushing up dairy prices.
The Bank of Canada this month increased its main rate for the first time in more than a year to 4.5 percent partly because of surging investment in the western province of Alberta to develop the world's largest pool of oil reserves outside the Middle East.

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