Effects of a Chinese inflation rate above government targets

This morning the Chinese National Bureau of Statistics announced that their version of the CPI (consumer price index) rose 4.9% in January, as compared to the year before.  Officially the 2011 inflation target for China is 4.0%.  So the actual rate logged for last month is 22.5% higher than targeted.

Analysis: Clearly the Chinese government is continuing to struggle with inflation in its economy.  The overriding problem is that there is just too much cash, and an ever growing pile of cash, is chasing a basket of goods that just isn’t growing as fast.

The cash is predominately coming from foreign purchases of artificially cheap Chinese goods.  Prices for these goods are so cheap because the Chinese refuse to let their currency, the Yuan, rise despite huge demand for Chinese goods.  That means that foreigners are pumping huge amounts of currency into the Chinese markets.  Unfortunately for the Chinese government, they cannot control this aspect of their economy.  So inflationary pressures are not going away any time soon, despite the government’s efforts to rein them in.

Ultimately, the effect will be to burst the economic bubble in China and to send China’s GDP (gross domestic product) into contraction.  I expect that the global effects of a Chinese GDP decline will be somewhat muted.

Importance grade: 6; in today’s release it was stated that the government of China expects inflation to remain high in the first half of the year, to subside in the second half, and to be muted in the fourth quarter.  I’m not entirely sure how the weighted average inflation rate target of 4.0% can be achieved for the full year 2011, if for half of the year the target of 4.0% is expected to be violated.

But the reason for the low importance grade is that my expectations for Chinese inflation – that it remains high – are borne out by statistics.  The only expectations being violated here are the Chinese government’s.

Jason