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The latest import from China: inflation

January 12, 2011

| MoneyRates.com Senior Financial Analyst, CFA

As communism has gradually ceded ground to capitalism in China over the past two decades, America has become accustomed to China being the source of inexpensive imports to this country. However, as China enters a new phase of its economic development, that may be changing.

If this new phase of development brings inflation pressures to the U.S., you'll want to keep a close eye on the market for savings accounts, money market accounts, and CDs. Those accounts--and customers--reacting most promptly will stand the best chance of staying ahead of inflation.

Two forms of inflation pressure from China

Inflation from China could spring from two sources. Internally, China is starting to experience inflation. Commodity inflation plus the price pressures that stem from a massive migration to its cities have driven the official Chinese inflation rate up to 5.1 percent. It may be even worse than that, as many economists believe the official rate is understated.

Meanwhile, China's exports may also become more expensive on the world market as the country has grudgingly begun to raise the value of its currency relative to those of its trading partners. China has kept its currency low to enhance its trading competitiveness, but as debt imbalances become extreme--i.e., with China financing much of the western world's debt--some currency adjustments are inevitable.

The news isn't entirely negative. This inflation is a symptom of growth, which could fuel Chinese demand for American exports. Increases in the Chinese currency would also help this flow of trade start to move more from the US to China.

That makes this a double-edged sword for savings and money market rates. While inflation cuts into the value of those rates, there is also a growth component to this story which could help start to push rates upward. The key will be to find the banks which react soonest to a rising rate environment, and ride the rates at those banks upward. As for CDs, this trend means you should not only shop for the best CD rates, but also consider keeping CD terms short so your rates can reset more frequently.

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