Chinese overheating to force further tightening
Simon Ward
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Chinese business surveys for October confirm earlier signs of a pick-up in economic growth accompanied by rising inflationary pressures.
The purchasing managers' input price index rose to a record high in data extending back to 2005, signalling a reacceleration of producer price inflation – see first chart.
An earlier post suggested that annual consumer food price inflation would rise to more than 10% by October, pushing the headline CPI rate towards 4.5%. This forecast remains on track: food inflation moved up to 8.0% in September and agricultural product prices continued to surge into early October – second chart. (Interestingly, the product price series has stopped updating on Datastream because it has been "suspended by the source".)
The decision to slow tightening efforts this summer appears to have been a major mistake, leaving policy-makers far behind the curve. Global markets are vulnerable to a catch-up, which may offset any positive impact from the Fed's QE.
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