A new threat emerges from the financial chaos

An era of high inflation is coming. China has raised its interest rates for the second time since mid-October. This move has been made to counter the country’s fastest-growing inflation rate in more than two years. Additional fiscal moves are expected as China is currently battling against various economic bubbles.

In spite of Chinese officials’ efforts to curb real estate speculation, property prices still continue to climb rapidly. Food prices have also shot up, raising concerns about possible social turmoil. China reported a 5.1 percent inflation rate for November, the highest in 28 months.

Also in November, Chinese exports reached a record $153.3 billion and the trade surplus exceeded $20 billion for the fifth time in six months, indicating a recovery in international trade from the global financial crisis.

Over the weekend, the People’s Bank of China announced that it would raise the one-year lending rate by 25 basis points to 5.81 percent. The one-year deposit rate will also climb by the same amount to 2.75 percent.

China’s problems will have implications for the global economy. If China suffers from higher inflation, the cost of its production will also rise. As China is the world’s production hub, its manufactured goods will also sell at higher prices to reflect the higher cost. In so doing, China will be exporting inflation to the world.

The perilous situation has been exacerbated by the United States’ money printing in an effort to reflate the domestic and global economies and stabilize financial assets. The second round of money printing has driven up commodity prices. Higher commodity prices will also create inflationary pressure. If the money printing goes unchecked ― other major central banks around the world have also been resorting to this desperate move ― it will further destroy the value of fiat currencies.

However, the world appears to be divided between opinions in the West and the East. The Western or more developed economies are going through deleveraging. Consumers and companies are paying down their debt. Their economies are also going through deflation. But the East is experiencing spectacular growth and also inflationary threats. China, India, Indonesia and Vietnam have been facing pressure from higher prices. Thailand and other Asian countries have also been trying to normalize their interest rates because they have some catch-up to do.

If these emerging countries can’t bring inflation under control, the economic growth prospects will be derailed. Social turmoil will arise as a consequence, on top of economic stagnation.

Thailand will have to stay vigilant against any threat of inflation. For once inflation goes out of control, it will be very difficult to contain. Next year the central bank should continue its interest rate normalization. If China exports inflation to the world, Thailand should then have a fall-back position.

(The Nation (Thailand), Dec. 28)