There is growing evidence that some of the world’s major developing economies might be overheating. China and Turkey in particular.
China has been experiencing rapid economic growth for nearly the whole of the previous decade. The Shanghai composite index is up over 100% since 2005, and roughly 500% in the past 15 years.
That growth may be coming at a cost. In May, the Chinese Consumer Price Index rose at an annualized rate of 5.5%. This was after the CPI declined in April to 5.3% from 5.4% in March.
The Chinese have been struggling with containing food inflation for quite some time. In November of 2010, the price of 18 key vegetables rose at an annualized rate of 62.4%, according to Business Insider.
Food inflation might harm the pocketbooks of Chinese consumers, but Ken Peng—an economist at Citigroup—is warning that wage increases might be behind the inflation, according to Business Day.
If wages are the driving force behind the inflation, the Chinese economy might be in for a turbulent future, as wage price inflation could signal that Chinese economic agents are factoring in higher inflation expectations.
Turkey is facing similar problems.
In May, inflation in the Turkey rose at an annualized rate of 7.2%. Perhaps most alarming, however, was not the actual rate of inflation but rather the rate of increase—inflation was up 2.4% from April.
Reuters reported that the International Monetary Fund was barred from releasing its full report on Turkey. The Turkish government stated that the report was written by an “inexperienced analyst.” Was this a valid critique, or is Turkey afraid to acknowledge the truth?
Perhaps the economies of Turkey and China are overheating because the central banks of those countries are stubbornly refusing to enact the necessary reforms.
The Central Bank of Turkey is attempting to fight inflation by increasing reserve rate requirements—the percentage of deposits a bank must hold as reserves—but refusing to hike interest rates. A policy CNBC described as “unorthodox.”
The People’s Bank of China, on the other hand, has hiked interest rates and increased reserve requirements to no avail. Some economic commentators have stated that China should remove its currency peg to the dollar. In that case, the Chinese yuan may appreciate, and inflation in China might subside.
There have been speculative announcements that the Chinese might do exactly that, but as of yet, no follow through.
These economies may face significant hardships in the future if there central banks cannot get a hold on inflation. However, both economies appear to be growing for a reason, and that growth may continue over the longer term.
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