Western inflation puts China in monetary stalemate

With producer price inflation at its highest level since the mid-1990s, China can’t ease monetary policy. Commodity price inflation is driving China’s PPI, and consumer prices will have to follow—unless input prices fall.

Some analysts thought the People’s Bank of China (PBOC) would respond to the third quarter’s low growth rate of 4.9% by loosening monetary policy. In background briefings, Chinese officials say that this simply won’t happen.

Monetary policy isn’t the appropriate tool for China’s slowing growth and rising inflation issues. The solution, rather, is structural. As the chart below shows, the culprit is raw materials prices. They are driven by the monetary policies of Western governments, not China.

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