The two biggest economies in the world are heading in sharply different directions - at least where inflation is concerned. A surge in food costs has pushed overall prices higher in China, while in the United States a sputtering economy is reflected in a consumer price index that is hardly budging, leading to fears of deflation.
There are very different perspectives on inflation in the developed world compared with developing countries, said BMO Nesbitt Burns economist Benjamin Reitzes. Fast-growing emerging markets such as China and South Korea are worried about price rises, while Western economies (with some exceptions) are generally not in that camp.
It's no coincidence, he said, that many of the countries that are now trying to stem inflation were ones that intervened in the past to keep their currencies undervalued - a move that is often inflationary. At the same time, in the developing world where food forms a higher proportion of individual spending, any shift to higher food prices can quickly touch off fears of inflation.
In today's interconnected world, any domestic action taken by a large economy can generate ripples around the world. Anti-inflation moves made by China could depress oil prices because growth will diminish and demand for oil decline. And all significant economic moves by the United States affect just about every country. Canada in particular won't likely see a strong recovery until the U.S gathers steam.
CHINA
The issue: A surge in food prices pushed the annual inflation rate in China to 4.4 per cent in October, well beyond the target range of 3 per cent. Food itself was up an astonishing 10.1 per cent that month, and the upward pressure was not caused by disease or drought, but by an active economy. Even McDonald's boosted its prices in China this week.
Worries: The government is concerned about inflation getting out of control, but it is also worried about social unrest. Many people spend a disproportionate amount of their income feeding themselves and their families, and high food prices can be a huge burden.
Response: Beijing is considering price controls, food subsidies, or even releasing stockpiles of some key commodities such as grain and sugar. The government may also try to crack down on speculation and hoarding. Rumours of an interest rate hike are also worrying world markets.
Consequences: More economic controls from a government already accused of manipulating its currency could diminish China's reputation, and slow its growth - bad news for the world economy over all. And if Chinese food producers decide to sell overseas, where prices are higher, domestic shortages could occur.
UNITED STATES
The issue: Core inflation (which doesn't include food or energy prices) was zero in October for the third month in a row, and annualized it's at 0.6 per cent - the lowest since the core rate was first calculated in 1957. Some sectors have seen outright price drops, raising fears of deflation.
Worries: If deflation takes hold in the United States, the dropping prices could cause the sputtering economy to get even worse. Falling prices can slow the economy further, or push it into recession, because people wait for even lower prices before buying goods, and companies are loath to invest.
Response: While the U.S. Federal Reserve Board's move into quantitative easing was mainly about trimming long-term interest rates, boosting the economy and decreasing unemployment, it was also designed to stem possible deflation. Pumping money into the economy should help boost lending and spending, pushing up demand and prices.
Consequences: Some of the liquidity injected into the U.S. market from quantitative easing is finding its way into emerging markets, including China, pushing up inflation in those countries. And QE is continuing to weaken the dollar, much to the consternation of other countries that want to boost their own exports to the U.S.