Tuesday, September 11, 2007

Inflation in China May Cause Interest Rates to Rise

Sources: Inflation Spike Pressures China on Rates, China's Inflation at 7-Year Higher, China Inflation Accelerates

Rising food prices in China have caused inflation in the developing country to accelerate. A high trade surplus in China earlier this year increased the amount of cash and, consequently, the prices of everything from eggs and meat to rent. Consumer prices rose by 3.8% in the past year. China's inflation is now at a seven year high. This inflation is putting heightened pressure on China's banks to absorb the extra liquidity (i.e. cash) by increasing interest rates - the first increase in interest rates in nine years.

Some economists worry that the exceptionally high growth rate of China's economy, which expanded over 9% last year, is putting the developing country at risk for negative backlash. These economists warn that China needs to slow down its growth. Other economists fear that doing so will have adverse effects on countries around the world. China's growth has increased its demand of exports, such a raw materials, and its exporting capabilities. As the sixth largest economy in the world, a slow-down in China's consumption has the potential to affect the economies of several countries.

How can China effectively balance fostering its own economic growth with other domestic policies?

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