With Chinese Inflation Jumping in October, What Will Beijing Do Now?

Food prices push Chinese inflation higher
Food prices push Chinese inflation higher

China reported much higher-than-expected inflation in October as a jump in food costs drove its consumer price index to a 25-month high. That's despite government efforts to cool the economy following a massive stimulus program. The question now is: What China do next to further slow economic growth and reach its economic targets?

China's CPI jumped 4.4% in October, mostly due to a 10.1% increase for food. The figure was also a much higher from September's 3.6% inflation figure, the Associated Press reported. Average inflation for the year has now reached 3%. So unless something changes over the next two months, the country is likely miss its official 3% inflation target, The Wall Street Journal reported.

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While the U.S. Federal Reserve has embarked on a second round of quantitative easing because of deflation and stagnation fears, China's problems are much different. Beijing wants to throttle inflation and create more sustainable growth rather than the current explosive levels (9.6% in the third quarter), which explains why China has been tightening its monetary policy. The People's Bank of China raised interest rates last month and ordered banks on Nov. 10 to increase reserves in an attempt to curb lending.

While inflation is so far limited to food, the flood of bank lending can spread inflation across the economy. Growth in loans outstanding also picked up to 19.3% in October from 18.5% in September, according to figures released today. And already strong industrial output boosted Chinese demand for oil to a record high, pushing crude to 25-month highs above $88 a barrel.

To do more, economists say Beijing might impose price controls if the cost of basic items such as grain continues to rise. Or it could raise interest rates again. Of course, any moves to further slow growth could affect the U.S. and other economies by cutting demand for their exports, while the Fed's new easing moves could further boost commodity prices, adding fuel to Chinese inflation.

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