The Utter Nonsense of Inflation as the Price of Chinese Prosperity

By Joseph Salerno

Well, well, well, the Chinese economy is experiencing inflation. Overall consumer prices rose by 3.6 percent in March 2012, year-over-year, including an upsurge in food prices of 7.5 percent. Even the prices of venerable Chinese herbal medicines took an upward leap of 8.3 percent. According to a CNNMoney report, inflation is “the price of prosperity.” The report goes on to fatuously instruct us, “While inflation poses challenges for consumers, it is the byproduct of one of the most robust economies in the world.” A comparison of China’s 9.2 percent real GDP growth in 2011 with the paltry 1.2 percent growth rate for U.S. real GDP in the same year is thrown in as supposed proof of this statement.


But this is utter nonsense and one of the most deeply entrenched myths in both academic economics and media commentary. Basic economic theory demonstrates that “economic growth,” which is nothing but  an increase in the supplies of various goods and services, is in and of itself deflationary. An increase in the supply of any good (or service), with the supply of money and all other factors fixed, results in a fall in its price and a growth in its sales, as the excess supply of the good drives the equilibrium price down and expands the quantity demanded. This irrefutable economic truth has been illustrated time and again since the late 1970s by sharp declines in the prices of items like personal computers, video game systems, HDTVs, digital cameras, and cell phones and of (uninsured) medical procedures like Lasik eye surgery and cosmetic surgery. Furthermore, this fall in prices has not caused stagnation in these industries but has instead coincided with their rapid expansion. I have explained this phenomenon of  “growth deflation” in more depth elsewhere.

What then is the cause of the accelerating Chinese inflation?

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