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Is Chinese inflation an American problem?

Marketplace Staff Jul 6, 2011
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JEREMY HOBSON: Now let’s get to China. The central bank there raised interest rates this morning for the third time this year. They’re hoping that’ll push people to save more of their money so that inflation slows down. Why does that matter to us?

Well, let’s ask Richard DeKaser, who is an economist with the Parthenon Group. He’s with us live, as he is every Wednesday, from Boston. Good morning.

RICHARD DEKASER: Good morning.

HOBSON: Well Richard, should Americans be concerned about rising inflation in China?

DEKASER: I don’t think they should be concerned from the perspective of it causing inflation here. And let me explain why. Everything we import, all the goods and services that come into this country only account for about 17 percent of our economy. And if you look at the Chinese share of that, it’s less than a fifth. So a little arithmetic tells us that Chinese imports are only about even less than 3 percent of the U.S. economy. And the prospect of that creating broader inflation here just doesn’t seem probable.

HOBSON: And what about inflation as a sign of an economy that is overheating? Do you think that there’s a bubble in China that’s about to burst?

DEKASER: Well, that’s the bigger question — not so much inflation, but how China’s managing it’s business cycle in whether it’s able to get a soft landing, that is to say a gradual deceleration of growth with lower inflation or a pop, but I think there is evidence that it’s overheating. Inflation has gone from roughly 2 percent a year ago to 5.5 percent now and even if you net out commodity prices it’s definitely on the rise.

HOBSON: Well if you think that the Chinese are trying to have a soft landing here, aren’t they doing just the right thing by raising interest rates to try to cool this inflation?

DEKASER: I think they are. You know, a decade ago, economic policy makers thought the best way to look at bubbles was to simply wait for them to occur because identifying them so hard and then deal with them after the fact, but then disposition now which is try and be a little bit more pro-active — that’s what the Chinese are doing. I think it does make sense.

HOBSON: Richard DeKaser, economist with the Parthenon Group, thanks as always.

DEKASER: My pleasure. Take care.

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