Chinese inflation in February accelerated at its fastest in 11 years as the worst snowstorms in half a century disrupted food supplies. But why does that affect us?
The authorities had been blaming a porker shortage. Now it's the weather. But whatever the reason, China has the same problem as much of the rest of the world.
Consumer prices are going through the roof. Chinese inflation in February accelerated at its fastest in 11 years as the worst snowstorms in half a century disrupted food supplies.
The double whammy of the global economic slowdown and rising costs is making life very difficult for central banks.
Chinese consumer prices climbed 8.7% in February from a year earlier, the fastest pace since 1997, after gaining 7.1% in January, according to government statistics released today. Food prices, which make up around one-third of the consumer price index, surged 23% while non-food inflation rose 1.6%.
The authorities are blaming the weather, which did indeed turn nasty. The worst snowstorms for fifty years caused widespread transport disruption, as confirmed by TV pictures beamed round the world of families failing to get home for New Year.
As blizzards damaged crops, vegetable costs grew 46%, while pork prices boiled up 63% as supply shortages continued.
But the numbers have been steadily deteriorating for several months and turned out much higher than expected.
All of which should point to decisive near-term action by the authorities to steady the nerves of jangled consumers, for many of whom food costs constitute 50% of the household budget.
The government has already stated its aim of capping price gains at 4.8% for 2008. Today's official reaction emphasised the need to stay calm, whilst also admitting that it will be "more difficult to control full-year inflation" because of the storms.
So clearly, further interest rate increases are in the pipeline. China has already tried to curb price rises, with notable lack of success, by raising borrowing costs six times last year.
But though the key one-year lending rate is at a nine-year high of 7.47%, the deposit rate is a mere 4.14% and the benchmark 15-year bond yield stands at just 4.17%.
With double-digit growth overheating the economy, those levels are nowhere near high enough. Short-term rates need an immediate hike of at least 2%, even though overseas shipments only advanced 6.5% in February, the least in almost six years.
Further government intervention, like the recent instructions to food companies to seek approval prior to upping prices, could also be on the menu. Although longer term, that tends to be no more effective that putting a lid onto a boiling saucepan without turning down the heat.
Bank reserve requirements have already been ratcheted up to their highest-ever level to cool lending, and legislators meeting at this week's National People's Congress will need to take even tougher action to curb so-called ‘hot money' inflows.
Why is this important to us here in Britain?
Trouble is, it looks like China will be raising interest rates while the US Federal Reserve cuts as low as possible at the same time. That could create what economists love to call 'significant global imbalances.'
In other words, investors will shift even more assets to China to take advantage of higher returns. As a result, the dollar (and pound) will fall which will mean soaring commodity costs hit us even harder.
Yet if Chinese inflation continues to accelerate unabated, we will end up importing it here. Big style. And we've got enough problems of our own on the prices front already.
But if China slams on the financial brakes, the world economy will be shunted a bit further into the buffers of recession.
For central banks, it's called Catch 22.
