Inflation is well set around the world. At least most commentators now recognise this, and have stepped away from telling us the main threat was deflation. The large increases in food prices which lax money policy has triggered have had one unexpected result – it has helped fuel the anger of the crowds taking to the streets in a succession of dictatorships. Inflation in India and Brazil has led to much higher interest rates in an effort to cool things down.
This week China has reported her inflation up to 4.9%. The Chinese authorities who allowed a big monetary expansion to ward off the effects of the western Credit Crash have been taking strong action to curb the price rises. Interest rates are over 6% and the banks are required to lodge a lot of money with the Central Bank to restrict their lending.
Today the Uk is likely to report that our RPI inflation is now higher than China’s published figure. Our official interest rates remain at 0.5%, almost 5% below the RPI inflation rate. The UK authorities will take no action to tackle it.
There are some important differences between China and the UK. The UK is heavily in debt, whilst China has record levels of reserves and investments in overseas bonds and Treasury instruments. China is growing quickly, whilst last quarter the UK did not grow at all. Chinese banks are still lending plenty of money despite all the efforts of the Chinese authorities to rein them in, whilst UK banks are unable to lend much owing to the new regulations and the aftermath of the crash.
The Uk authorities are banking on China succeeding in slowing things down, and taking some of the heat out of commodity markets. Meanwhile the US keeps printing dollars. Some of those will continue to find their way into commodity speculation. The more the US presses the monetary accelerator, the more China, Brazil and India have to put on the monetary brakes. It’s not a great system.