On Inflation for the Country China - Research Paper Example

Causes of Higher Inflation in China Evidently, the higher inflation in China can be attributed to numerous factors. According to Yu (2011), the Chinese government’s increased currency control ended up in an artificial decline of foreign exchange rate of the Yuan and this adverse situation in turn amplified manufacturing and export business activities. Macroeconomic theories clearly state that decline in the real value of currency is the most severe impact of higher inflation. At the same time, the cheaper Chinese currency made imported food items and energy resources unaffordable to the country’s people.

Economists strongly argue that the county’s unprecedented development rate have added to a severe demand pull inflation. In china, unbridled growth of consumerism together with rampant rise in population continues increase in consumer demand. Probably, the increasing consumer demand in turn would significantly augment business activities and ultimately the cost of production. As a result, firms are compelled to charge higher prices for their products that would be unaffordable to lower and medium class customers.

Many of the economists and corporate business magnets are of the belief that the value of the Chinese Yuan would improve in near future. This expectation has resulted in huge inflows of hot money and other long term investments to the Chinese economy. This large volume money inflows to the country cause asset bubbles in Chinese property market, especially in the industrially developed cities like Shanghai and Beijing. Consequences of Higher Chinese inflation According to Feldstein (1998), it has been identified that the inflation always hurts people’s standard of living since rising prices force them to pay more for the same goods and services.

As Flynn (2011) reports, the inflation has a direct influence on gas prices in China as a result of governmental regulations that vehemently try to combat inflation. This situation makes the financial planning a troublesome task because the increased gas prices lead to home value loses. Inflation also badly affected the people’s retirement planning due to the increasing uncertainty regarding the future. Since the Chinese people are compelled to spend more and more on same goods and services, they would not have excess amount available to save.

Similarly, if people expect further inflation, they are more likely to be extravagant as they envisage worse condition in near future. This economic condition turns to be one of the potential challenges to the Chinese economy as it may lead to further inflation. During the last three years, the difference between demand and supply and the resulted inflation went beyond Chinese government’s control; and consequently buyers trimmed down their day to day expenses in order to vie with the increasing price level.

At the same time, producers cut down their output levels so as to retain minimum profit margin. In total, both these situations seriously affected the economy as they minimized long term economic gains. How to Manage Inflation in Chinese Economy? According to Premier Wen Jibabo, “China must continue efforts to control food and housing prices to ease soaring inflation and maintain economic development and social stability” (cited in SPK Group Co., Ltd., 2011). Wen also advises authorities to increase the outputs of farm