China's inflationary pressures and their impact on inflation in euro area

Abstract

China was able to combine slow inflation with very rapid economic growth for more than a decade. Finally, in 2007 inflation started to accelerate and there are a number of factors that may increase the pressure on China's price level in the near future. Most importantly, money supply growth is expected to remain rapid due to the ballooning foreign currency inflows. In addition, according to some estimates, economic growth has accelereated above its long-term potential and also a number of structural factors are likely to push production costs up. Counterbalancing part of the rising costs, productivity growth has somewhat accelerated during recent years. With low cost levels and fastly growing exports, China is believed to have exported deflation into its trading partners in recent years. However, due to the fact that the direct impacts of globalisation on inflation in the advanced economies have been moderate, also the effect of a possible rise in China's cost leve! l on inflation in eg euro area is expected to remain small. However, the indirect impacts on price dynamics are much more difficult to forecast. Keywords: China, inflation, monetary policy