CHINESE inflation is structural and risks derailing the global economic recovery, according to a quarterly inflation report by business consultancy McKinsey. The report, released at the start of the World Economic Forum in Davos, warns leaders that China is in danger of overheating and causing major disruption to worldwide demand.
“The entire system is now so highly stressed that one snowstorm brings large spikes in food and energy prices as coal runs short,” writes McKinsey director Gordon Orr, a director in the firm’s Shanghai office. The Chinese consumer price index inflation topped five per cent in November last year.
The report coincides with a similar warning from the IMF that Chinese demand will send the average oil price for 2011 to over $90 (£56.7) a barrel, versus $79 last year. The IMF is still overall positive on growth, forecasting a global expansion of 4.4 per cent this year, but warns that “if policymakers fall behind the curve in responding to nascent overheating pressures... emerging economies could be setting the stage for boom-bust dynamics”.
Orr warns of a similar crash risk: “The food supply chain, running at the limit, is close to breaking, and the pressures this problem creates will lead to further food quality crises,” he writes. “What’s more, price caps won’t be effective... Rising food prices are a pan-Asian issue.”
The prospect of emerging market bubbles has been a major point of concern in discussions at Davos. Economist Nouriel Roubini named rising prices as a reason to see the global economy as a “glass half empty”: “This growth in inflation in emerging markets, is leading to another challenge,” he said.