Nov 24, 2010 01:37 PM

Destination Inflation


Inflation has become a threat to social stability. The government is responding with a combination of monetary tightening and price controls. While these measures may calm inflation fears among the masses for the time being, the fear may come back with a vengeance if the measures fail to achieve the stated purposes.

China has entered an era of inflation. How high inflation averages over the next five years will be mostly determined by the rippling effects of monetary expansion in the past decade. It is too late to try to push inflation back. What is needed is action to safeguard stability during this inflation era.

The necessary policies for maintaining stability are (1) to increase interest rates to the expected average inflation rate over the next five years, (2) to increase allowances for the population on fixed payments (e.g., pensioners and students), (3) to accommodate market forces for wage increases, and (4) to decrease personal income tax rates to prevent rising tax burdens on inflation impact on nominal income.

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