Higher Inflation in China: Risks for Inflation and Output in Advanced Economies

The period of imported price stability in the advanced economies may come to an end soon as inflation in China is starting to accelerate. The Kiel economists Klaus-Jürgen Gern, Björn van Roye and Joachim Scheide argue that higher inflation in China leads to upward pressures on consumer prices in the advanced economies. As a consequence, central banks would face a trade-off between stabilizing inflation and supporting domestic demand in order to reduce the output loss from the fall in real incomes associated with higher inflation and lower exports to China. With higher imported inflation, interest rates in advanced economies will be higher than otherwise as central banks will have to depress domestic inflation in order to reduce overall CPI inflation back to target.