China does not quite fit the classic definition of stagflation: a persistent combination of high inflation with sub-par growth. But prices were still rising in July and growth, if still firm, appears to be fading. A regular reading of activity levels by purchasing managers within the service sector, published by HSBC/Markit on Monday, recorded a series-record low of 50.6 for the month of August. That signals no more than a marginal expansion. Six of the 13 official PMI series tracked by China’s Federation of Logistics and Purchasing have dipped below 50, indicating contraction. Even in the world preoccupied by Europe, this should raise concern.

China’s policymakers are in a bind. Note that August was the first month this year that was free of increases in either the reserve requirement ratio or interest rates. As the US and Europe once more struggle for economic traction, some factions within the politburo would like to join them in an extended pause in monetary tightening, or even to ease a little. But headline consumer price inflation, politically sensitive in China, will not allow it. July’s CPI was almost unchanged at a three-year high of 6.5 per cent. Local media reports suggest not much change in August’s reading, to be reported this Friday.

The good news is that base effects, if nothing else, will help to tame CPI in the coming months. A rising currency, too, works to take the edge off import prices: August’s 10 per cent annualised rate of gain against the dollar was the biggest since last September. But for now, the tensions are obvious. Writing last week in the policy periodical of the Chinese Communist party, Premier Wen Jiabao reaffirmed that price stability is the “primary task”, while claiming that signs of slower growth are “at a reasonable level”. Maybe they are. But balancing between jobs and prices has rarely seemed so complex.

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