How big is ChinaÆs inflation problem?

With ChinaÆs economic growth rate set to drop and the central bank sticking to its anti-inflation policy stance, inflation is unlikely to get out of hand. But expect rate hikes in the months ahead.

ChinaÆs consumer price inflation moderated to 7.7% year-on-year in May versus 8.5% in April, and the core rate slowed to 1.7% from 1.8% in April. The big gap between the headline and core inflation rate amounting to six full percentage points suggests that rising inflation so far has been a relative price shock, not a rise in the general price level Chart 1.

However, inflation expectations are creeping up, albeit slowly, underscoring the need for China to ônormaliseö its...

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