CPI UP: Indian customers shop in a supermarket on June 27 in Calcutta. The Indian
Government announced that day that the country's CPI increase for June hit a 14-year
record high of 11.4 percentIn the wake of the U.S. subprime
mortgage crisis, inflation has spread to countries around the world.
Meanwhile, the global economy keeps sliding.
Under these circumstances, can China survive the storm?

Chinese experts point out that world inflation could last a year or more, with no clear solution as yet discovered. For China, with its increasingly globalized economy, some inflation is inevitable. To prevent higher inflation risk, however, experts say the Chinese Government should take macro-control measures such as tightening monetary policy.

Worldwide inflation storm

The worldwide inflation storm started last year and soon affected many countries.

According to Chen Fengying, Director of the Institute of World Economic Studies, China Institutes of Contemporary International Relations (CICIR), by now at least 40 percent of countries and regions have seen double-digit inflation rates.

"Emerging markets such as Viet Nam, India and Latin American countries have experienced a more severe impact," she told Beijing Review.

The economic situation in Viet Nam is especially dire. During the first five months in 2008, the country's consumer price index (CPI) increased 19.1 percent over the same period last year, with its trade deficit ratcheting up to $14.4 billion. The country's CPI rise reached 26.8 percent in June, an 18-year record high, and the government has had to decrease its projected gross domestic product (GDP) growth from 9 percent to 7 percent. On July 25, the Vietnamese Government announced the CPI increase would reach 27 percent in July.

"Global inflation is the result of a chain reaction that started with the U.S. subprime mortgage crisis," Chen said. The crisis led to a large-scale depreciation of the U.S. dollar, followed by a round of price hikes for basic materials such as agricultural products, energy and mineral resources. World food prices had been extremely low for a long time, Chen said, making farmers in developing countries loathe to grow crops. "To provide incentive to grow agricultural products exported at a lower price, developed countries offer high agricultural subsidies to their farmers," she said. As production costs skyrocketed, inflation spread-and it is affecting developing and developed countries in different ways.

"Worldwide inflation creates more bitterness for developing countries than developed ones, especially for those that have a higher Engel index, which measures living standards," said Zhen Bingxi, a senior research fellow on the world economy from the China Institute of International Studies (CIIS). In developed countries, fuel and food account for only 20 percent to 30 percent of their CPI. But in some developing countries, they can make up over 50 percent.

Zhen said the highest oil price in 2007 was $95 per barrel. By mid-July this year, oil had reached $147 per barrel, nearly double the price last year. In the meantime, the price of grain has almost doubled as well.

Both experts predicted that worldwide inflation could last for one or two more years, depending on how the U.S. subprime mortgage crisis unfolds. "If the United States can generally solve its crisis, then the world can lower the inflation pressure step by step," Chen said.