China’s inflation pain may lead to increased import prices for Australia.

An ominous sign for Australia’s inflation rate is coming from the world’s manufacturing giant China.

China is facing a leveling in productivity while its commodity prices increase. It has stepped in to freeze prices for energy, water, transport, fertilizers and medicines. This is being done to contain inflation that is running at an all time high. In addition, Reuter’s Wei Gu reports that a more stringent labour law took effect this week that is set to increase labour costs. He argues that over the last five year period China was a deflationary force, helping keep global prices low and that in the future it may not be able to contain costs as it has done in the past.

Considering the trouble developing in the US, the global impact of rising export prices for Chinese goods may put added pressure on countries like Australia that import their products. The increases in local prices that lifted inflation last year were moderated by the low prices for products imported from China that acted as a cushioning effect.

Undoubtedly the new Rudd government will feel it has inherited a poison chalice as global conditions deteriorate. It must however, act to contain inflation if it is to stabilise the interest rate rises which banks are already increasing. Just what measures it will have to implement remain to be seen and no doubt will bring some pain to us all.

How well China is able to contain inflation may prove to be more important to the global economic situation and to Australia’s growth and prosperity than we imagine.

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~ by abstraktbiblos on Friday, 11 January, 2008.

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