With inflation rates rising around the world, China has so far been spared the worst of the impact of the Ukraine crisis on domestic prices. But the key question is how long before the fallout from higher energy and other commodity prices begins to threaten Beijing’s 3 per cent inflation target for 2022? Consumer price rises might seem subdued now, with headline inflation running at 0.9 per cent over the past two months to February, but higher prices could start feeding up the chain fairly soon. With crude oil prices up over 80 per cent from a year ago, import prices 10.6 per cent higher in the past 12 months and producer price inflation running at 8.8 per cent, might consumer price inflation breach the 3 per cent target before the year is out? As the pendulum swings towards higher inflation, it begs the question whether Beijing needs to take earlier preventive measures and switch gears towards a tightening bias on monetary policy very soon, especially with the US Federal Reserve moving towards faster interest rate rises . Beijing needs to fend off inflation risks, and sooner rather than later. It will be no easy task walking the fine line between the government’s growth target of around 5.5 per cent and 3 per cent inflation target. There is no magic monetary and fiscal formula which can meet both objectives in one fell swoop. With the economy showing signs of slowing, any efforts to ramp up growth will be at the expense of domestic price stability. But subduing inflation with tougher policies could also drag on China’s growth potential. It’s a challenge facing most global policymakers right now. How Beijing deals with it boils down to which seems more pressing – fostering faster growth or damping down inflation. Faced with such a stark policy choice, it would be much easier for Beijing to ramp up growth if needed, rather than beat back higher inflation by the time it grips the economy. At present, there is little chance of domestic overheating or demand-pull inflation, but China is becoming increasingly exposed to cost-push inflation risks arising from the global supply chain crisis of the past two years and, more recently, the surge in energy prices caused by the Ukraine crisis. China’s policymakers need to worry about the knock-on effects from higher prices squeezing real incomes and sparking a wage-price spiral in the process. There are parallels to consider. In the United States, the labour market is running red hot, bumping up wage expectations and pay demands in the process. The February jobs report showed the unemployment rate dropping to 3.8 per cent and getting closer to the 50-year low of 3.5 per cent reached in January 2020 just before the Covid-19 crisis struck. The booming labour market has subsequently pushed US average earnings growth in February to 5.1 per cent year on year, well above the long-term average. With US inflation hitting 7.9 per cent in February and expected to go even higher in the coming months, real wage growth has slipped into negative territory, posing a sharp squeeze on take-home pay. The US could be on the verge of a damaging wage-price spiral if this persists. Fed’s hawkish inflation turn isn’t necessarily bad news for China’s economy It’s no wonder that the Fed is weighing the possibility of more hefty half-point interest rate rises to contain larger inflation risks. Moreover, the upshot of the US central bank’s war on inflation is that it adds to the dollar’s interest rate appeal, especially when the currency continues to be bid higher owing to its safe-haven status. The corollary of the stronger dollar is that China’s renminbi could come under threat , at a time when a strong and stable exchange rate is needed to fend off the impact of imported price pressures. Beijing’s policy choice is between letting domestic interest rates and the renminbi slip to bolster growth prospects, or toughening monetary policy to support the currency and draw a line in the sand against future inflation risks. If Beijing gets its policy balance right, it should come close to meeting both its growth and inflation goals. Interest rate easing should come to an end, but it means Beijing must open the door to much faster fiscal expansion to take the strain. David Brown is the chief executive of New View Economics