Inflation is reflected in the rise in prices of daily use items and technically indicates that the gap between demand and supply is widening. It is not an economic ill itself; it is a symptom of the fact that a country’s economy is not being managed efficiently and properly. It is measured through various price indices prepared by the statistical organizations. As it is not always possible to increase the supply of goods and services to bridge the gap, central banks try to control inflation through controlling the money supply. This is done through various monetary policy instruments. When there is less money supply and people find other alternatives more attractive to park their money in, the prices come down. This is a conventional instrument.
However, when the increase in prices is due to unconventional factors like hoarding, which is being done in Pakistan in case of Pakistan, the countries need to take unconventional measures. That has recently happened in China. The Economist has reported that the State Council, China’s cabinet, promised “forceful measures” to stabilize prices. It said it would drum up supply and crack down on hoarders and speculators. It even threatened to “interfere” with the prices of daily necessities, which might include grains, cooking oils, sugar and cotton.
Imagine, the scale of inflation is not yet a threat to the republic in China. But consumer prices rose by 4.4% in the year to October, the fastest rise for over two years. Food prices, which account for more than a third of the consumer-price index, are largely to blame: vegetables are almost a third more expensive than they were a year ago. Even the most exotic commodities have been affected. As China’s prices rise, consumer confidence and the stock markets are falling. Shanghai shares have fallen by a tenth since the inflation figures came out. Rising food prices may explain China’s inflation, but what is behind their rise? Floods, including a deluge in Hainan province last month, hurt some crops.
Harvests have also disappointed elsewhere in the world: the UN’s Food and Agriculture Organization said this week that the cost of the world’s food imports may exceed $1 trillion this year, only $5 billion short of the record bill in 2008. The macroeconomic weather has also played a role. China’s banks appear determined to breach their quota of 7.5 trillion Yuan ($1.1 trillion) of new loans this year. The People’s Bank of China raised their reserve requirements this month for the fourth time this year and lifted interest rates in October for the first time since 2007. But neither step will do much to constrain banks swimming in deposits and lending to an economy growing, in nominal terms, by 15% a year.
And so the government is reaching for less conventional weapons. To shield the vulnerable, it urged local governments to raise unemployment benefits, pensions and the minimum wage in line with inflation. It also promises to increase shipments of cotton from the western region of Xinjiang, and to cut the price of electricity, gas and rail transport for fertilizer makers. To keep the population sweet, on November 22nd it will sell 200,000 tonnes of sugar. If extra supplies do not curb prices, the government may set caps. It may repeat the kinds of measures it imposed in 2008, when food inflation topped 23% after an outbreak of disease killed many of China’s pigs. Then, the government required sellers of pork, rice, noodles, cooking oil and other staples to ask permission before raising their prices.
Such controls serve as an “extreme signal” of the government’s determination to fight inflation, note Mark Williams and Qinwei Wang of Capital Economics. That may help quash self-fulfilling expectations of higher prices. But beyond that, price controls have “little to commend them.” If sellers cannot fetch a good price, they will limit the supply of what they offer, or adulterate the quality. Whenever the government stops petrol prices from rising in line with oil prices, queues at the pump merely lengthen.
Inflation undermines capitalism, according to Keynes, in part because it discredits entrepreneurs. They become “profiteers” in the eyes of those hurt by rising prices. China’s leaders promise to hunt down and punish hoarders and speculators. According to Andy Rothman of CLSA, a broker, some traders are taking possession of agricultural commodities in the hopes that prices will rise. But how to stop households buying two bottles of cooking oil rather than one?