Consumer price inflation has started to diverge sharply in China and the US in recent months. Although this may be distorted by the higher weight given to rising food prices in China’s CPI data, it may also be due in part to China’s determination to keep the yuan down against the dollar.
The policy of currency intervention is starting to bring with it some definite costs for China, and their attempts to square the circle – keeping inflation low, while simultaneously keeping the exchange rate stable – can really only work in a controlled, non-market system. As China develops further towards a market economy, squaring this circle will become more and more difficult. Read more