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China’s Inflation Muddle

Even as the debt crises in Europe and the US loom large and the global economic recovery falters, inflation is making a comeback. Indeed, emerging-market economies are bracing for a serious bout of it – and bout that China is already fighting.

BEIJING – Even as the debt crises in Europe and the United States loom large and the global economic recovery falters, inflation is making a comeback worldwide. Indeed, emerging-market economies are bracing for a serious bout of it – together with the dire political consequences that it will bring.

China’s headline consumer price index (CPI) jumped 6.4% year on year in June, reaching its highest level since July 2008. Against the background of a shaky global recovery, concerns have grown considerably over a possible hard landing for the Chinese economy, caused by monetary tightening aimed at controlling inflation.

In China, food prices account for about a third of the CPI basket, with the price of pork bearing a large weight. As a result, the CPI is jokingly called the “pork price index.” In June, pork prices rose 57% year on year, contributing nearly two percentage points to the overall inflation rate. Unfortunately, macroeconomic policy can do little about the “hog cycle” and usually should not respond to it.

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