Inflation Runs Wild In India And China

Some economists claim that most of the inflation in the world’s two largest countries by population is due to a rise in the cost of commodities and oil. That is almost certainly the case. Other experts say that commodities prices will collapse as world GDP slows. That may not be the case at all.

There is a powerful argument that the shortage in agricultural goods is due to supply problems brought on mostly by inclement weather. That means the yield issues could continue for years. The “recession will cause oil price drops” argument is popular. OPEC has made that case more difficult to defend. Saudi Arabia has increased its production but it is unlikely to offset drops in exports from Iran and Libya. The oil supply shortage could drag on indefinitely.

The Indian and Chinese governments believe that monetary policy will stifle the rise in prices. But, tightening does not mean that the demand for food and fuel will definitely drop. Factory activity could be slowed by a drop in access to capital for expansion but that could be partly offset by factory revenue which is driven by a demand for Chinese exports.

And, China is likely to export inflation. The costs of its goods have risen with wages and the prices of raw materials. Inflation in China may come down to 5%, or even a bit lower. Manufacturing margins still need to be bolstered by prices which are passed along to trade partners.

The issue in India is slightly different. Inflation could hurt consumption patterns there. That, in turn, will stifle imports. High prices do not necessarily disappear with lower demand. Inflation is a global problem and a drop in consumer spending in one nation alone will not eliminate it.

The case that global inflation is not rampant now is based on the theory that inflation is confined to oil and food prices. But, those two things seem to be enough to drive global prices higher.

Douglas A. McIntyre