The developing middle class, food and metal prices – and an attempt to keep the renminbi at a modest value – has sent Chinese inflation to new highs to 8.7% from last February. This growth in consumer costs and money supply has sent Chinese markets up, still outpacing the inflation statistics.
The increase in food prices is an external factor that has affected the world economy. Subsidies to make farming corn more profitable than other crops has sent the price of corn upward. Ethanol producers cannot seem to get a hold of enough biomass, as many countries now give huge tax benefits and credits to farmers that grow crops for biofuels. The price of vegetables is up 46% year over year, while cooking oils such as vegetable oil were up 41%. The increase in price for vegetable oil can be largely attributed to biofuels, as it is a main component in bio-diesel and other fuels that have thrived in the green revolution. High crude oil prices has sent producers looking for cheaper fuels, propping up the cost of food for the rest of the world. When commodities were priced for nutritional value, rather than the cost of energy, food prices remained stable. But as the world shifts from fossil fuels to new age bio-fuels, the price of food has moved with the price of oil.
Further hurting food prices is the amount of energy it takes to ship foods from farms to consumers. Packaging, such as plastic, is also becoming more costly because of the amount of energy and oil it takes to produce. This rise in price is hurting the consumer who is more interested in buying cheaper goods than benefiting from cleaner energy.
China’s thirst for energy is also raising the price around the world. Much of China’s growth carries over into the oil market. Each percentage point growth in the Chinese economy is virtually parallel to the increase in oil demand and also an increase in price. While the renminbi has advanced considerably against the US Dollar, China still places a heavy weight of dollars in its currency peg basket. Thus, the currency gains have yet to offset the difference in energy prices.
Luckily, the rest of China’s inflation issue is hardly an issue at all. Excluding food products, inflation only grew by 1.6%, which is near nothing compared to other developing nations. This shows that the growth in China is due mostly to positive investment, rather than a growing money supply. Chinese stock market gains are not yet removed by consumer inflation, a promising statistic for both the citizens of China and investors hoping to make a quick buck.