QE2 is damaging global economic prospects as an associated rise in commodity prices squeezes real incomes and forces central banks in emerging economies to tighten policies.

China's decision this week to raise reserve requirements temporarily for six large commercial banks suggests that another phase of restriction is beginning in response to economic reacceleration, rising industrial cost pressures and soaring food prices – see previous post.

Based on recent gains in the weekly food produce price index, the CPI food component could rise by about 3% between August and October – see chart. Since it was little changed between August and October 2009, this would push the annual increase up from 7.5% to more than 10%. With food accounting for one-third of the CPI basket, this, in turn, implies that headline inflation could rise from 3.5% in August towards 4.5%.