China Inflation

Topics: Inflation, Monetary policy, Money supply Pages: 6 (1951 words) Published: January 28, 2013
In recent years, China has met price of commodities rising quickly, inflation has affecting the overall economy. In this article, I will analyses last five years status of China inflation, explain the cause and effects, then base on the cause and effects, giving some solution to deal with the inflation.

According to the definition of economics, inflation refers to the number of currency in circulation more than economic operation needed, and then cause currency devaluation and a persistently rising price level. In order to precisely explain inflation in China, I selected last five years inflation rate to analyze the overall condition about China inflation.

Inflation rate,
The following chart shows last five years inflation rate and trend of change.

* In these chart, we can clearly see that, after 2008 years high inflation rate, inflation rate has fallen during the 5 years. But the size is not big. Since 2009, the inflation rate was going a new round of the rising trend. On the surface, china inflation is not so high, but some of the industry's price rising greatly, such as agricultural products and real estate industry. And during last thirty years, overall commodity price in china has kept rising quickly. So China inflation is still a serious problem.

The cause of China inflation

Demand-pull inflation
The inflation because of aggregate demand excessive increase is called demand-pull inflation. In order to deal with the financial crisis in 2008, to speed up the pace of economic growth in China, the central government carried out 4 trillion RMB investments and a series of stimulate measures to expand domestic demand. In China, the fixed assets investment increased 30 %( compared to 2008 ),the amount of fixed assets investment is 22.46 trillion RMB in 2009( 65.9% in annual GDP ) and 27.81 trillion RMB in 2010( 69.8% in annual GDP ). Depends on the huge number of investment and loans, China economic recovered faster in the world, on the other hand some area assumes the extension expansion, break the balance of economic structure, has formed a serious pressure of inflation. Unhealthy investment is other problem in demand-pull inflation.

Cost-push inflation
1. Employee wages rising
Wage growth makes the production cost growth, on given price levels, the profit level of manufacturer will decrease, manufacturers willing and are able to supply the number of products will decrease, so that the aggregate supply curve shift to left, is caused the price level increase. In 2008 and 2009, the average worker real wages indexes increase from the previous year were 11% and 13%. Over the same period, the GDP growth rates were 9.6% and 9.2% respectively. Worker average wage index rising more than the GDP growth rate of the same period. Wage growth has led the production costs and the total price level increase.

2. Inflation triggered by the rising prices of raw materials In China, after the financial crisis of 2008, the huge investment in fixed assets need a great number of raw material such as steel, wood and cement to support it. The phenomenon of demand greater than supply causes the rising price of wood, cement and steel. That is the beginning of comprehensive price rising. Imported inflation

In May 2011, the middle rate between RMB and us dollar break 6.5. China external dependence is relatively large, the decrease in us dollar will transfer the influence to China. Because persistently rising price of international bulk commodity, the biggest importer and trade processing section—china, has suffered huge pressure in cost growth. On the other hand, china is a biggest importer in oil, mineral, food. So when the price of these goods increase significantly, at the same time, through the imported channel affect the general price level in China, leading the imported inflation. In recent years, because of the good investment prospect and appreciation expectations of RMB, also result in a number of unknown...
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