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China has Inflation Under Control Despite Geopolitical Issues

In: Finance, Forex

This is not how it’s supposed to work, inflation should be more pronounced in emerging markets, where logistics are less streamlined and commodities traders have fewer hedging tools.

Consumer prices are surging in the U.S. and Europe, but in China, food and energy costs are becalmed. Judging by the latest inflation numbers, developed nations are turning into emerging markets.

The U.S. reported 8.5% year-on-year jump in March, while inflation in the U.K. soared to 7%, a 30-year high. Meanwhile, Chinese consumers saw only a 1.5% rise in prices last month.

Meanwhile, President Biden has pointed his finger at supply-chain disruptions, the fallout from Russia’s invasion of Ukraine and China’s renewed Covid restrictions. And he’s not entirely off the mark.

Shanghai, the world’s largest port is closed, amid a lockdown to stamp out omicron. Right now, the city is too busy conducting daily mass tests and building makeshift quarantine hospitals to supply the world with electronics and toys.

There is an argument for shortening supply chains and bringing manufacturing to one’s home turf. For decades, American consumers benefited from the cheap labor in China. But it’s coming back to bite, as workers there are now forced to stay at home.

How about inflation as a monetary phenomenon? Supply disruptions are just one factor. Thanks to the pandemic stimulus checks and the Federal Reserve’s easing programs, there’s just too much money floating around in the U.S.

Money-supply growth reached 27% in February 2021, and despite all the talk of interest-rate hikes, the Fed was still funneling cash into the economy with purchases of government notes as recently as a month ago.

China is acting quickly in part because it recognizes that rising prices are a political problem and can easily lead to social discontent.

Russia’s invasion into Ukraine is not easy on China, the world’s biggest importer of oil and agricultural products. But unlike the West, which is trying to fight off high energy prices with handouts and subsidies, China is prioritizing self-sufficiency as a national security goal these days.

While not democratically elected, the Communist Party is sensitive to public opinion. Food, for instance, accounts of an estimated 20% of a typical consumer’s basket, whereas it’s about only 14% in the U.S. Milk, vegetables, meat and fruit are the day-to-day items consumers look at to judge how their government is doing.

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