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[Tor]

Global Economics China's nightmare inflation figure for August: implications As had been expected, figures released today confirmed that Chinese CPI inflation for August rose to a decade-high of 6.5%. As in previous months, the entire rise was contributed by soaring food prices – meat in particular – while non-food inflation remained tame at below 1%. Today’s data increase the likelihood of a 27bps interest rate hike later this month. The adverse inflation reading for August was not a surprise (see yesterday’s Globeweb note on producer prices where we flagged this up). While the prospects of a rate hike within the month are rising, we do not foresee economy-wide draconian measures being implemented as high inflation is restricted to a narrow group of food items only. Chinese food prices are currently supply-driven and will not respond to broad monetary policy. What is crucial, though, is that non-food inflation is tame at sub-1% and is not exhibiting even a mild upward trend. Nevertheless, we have another 27bps interest rate hike factored into our 2007 forecasts. Our GDP growth forecasts for China are: 11.8% (2007) and 10.7% (2008). Spurts in food prices are, typically, short-lived and seasonal. We think that a comprehensive reversal is likely by year-end. Chinese monetary authorities probably realise this, but may still use the opportunity to normalise interest rates which, today, are far below nominal GDP growth. There is now a growing risk of more serious policy controls within the food sector. Direct price controls on a number of key categories may be introduced. If this is done, reported inflation figures will level off quickly. This will help the management of inflationary expectations – indeed, this is why policymakers might adopt such measures. Price controls, though, are notoriously difficult to implement – black-markets readily spring up to bypass them. dkb today.

[*JB*]

SEE: http://www.nytimes.c...s...nyt&emc=rss

China is having -- or is on the verge of -- a country wide labor shortage and inflation is a real prospect for a whole lot of thngs other than food.