Playing With Fire
The Chinese government failed to act aggressively against their growing inflation problem. The failure to act seems to suggest their political will or perhaps they’re failing to grasp the looming danger this inflation problem poses for the Chinese economy. Oh sure, the Chinese government promised to do more to combat inflation that came in on the consumer side at a blistering 5.1% and on the producer side at an even more disturbing 6.1%. Yet China's lack of courage is a green light to start buying commodities again. The market is going to lose confidence in the already shaky China central bank.
As China's inflation rate soared to a two year high, the Chinese government failed to act decisively. Promises are nice but some wonder what it is going to take. China is getting intoxicated with its growing economic power and the bubble it is creating. When the bubble is expanding it feels so good that you hate to let even a little air out of it. Of course if they don't, we know how this story will end, we know that it will not be pretty. The reason the Chinese failed to act is they said that a lot of the inflation price came from food prices which increased by a whopping 13.3% and by temporary and seasonal factors and they believe will likely slow inflation back to 5% or lower in December. They believe that some of the steps they have taken to ease feed cost by releasing government reserves of grain should help put downward pressure on prices.
Yet to blame the increase on food prices seems to suggest that the Chinese government is in denial. Residence costs and utility costs increased by a hefty 5.8 percent. The Chinese are blinded by their manipulation of their own currency and fear that any devaluing of that currency even the perception by increased rates seems to suggest a lack of confidence in their own people and their own economy. Now with China's data underestimating its real inflation numbers, it is possible that we may see the bubble burst faster than they imagine.
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com.
