Fears are growing in China that inflation may start to affect more than just food prices. Consumer prices in China rose 8.5% in April from a year earlier.

“Resurgent inflation, everyone agrees, seems a global problem while a slowdown may be largely limited to the US with some spillover effect to Europe,” according to a report in India’s Financial Express newspaper.

China exported deflation for the last 15 years by stocking the shelves of retailers in the West with products made in their factories employing cheap labour and easy capital. Chinese imports constitute 7.5% of spending by Americans on consumer goods, but they make a higher share of categories such as toys, foot ware and clothing.

A closer look at drivers of Chinese inflation is in order to anticipate what to expect from the world’s factory in the coming years. The cost of manufacturing in China has been rising not only due to rising fuel and commodity prices, but also due to upward pressure on wages partly as a ripple effect of the new labour law and increasing cost of capital as a result of increase in interest rate by the Chinese central bank.

However, high food prices were the main driver of the steep rise in the country’s CPI.  China’s non-food prices in April were only up by 1.8% year-on-year.

“Last week,” says Peter D. Schiff in Money Morning, “several key Chinese officials, typically not known for their candor, conspicuously noted the need to both stimulate domestic consumer spending and to bring down roaring inflation.

“While at first blush these two goals might appear mutually exclusive, China’s leaders do have a “magic bullet” that can hit both targets at once.

“A stronger currency, commensurate with China’s increased economic strength, will simultaneously tamp down inflation and enable Chinese consumers to buy more goods and services. However, for reasons not entirely clear to me (or few others, for that matter), China’s leaders are resisting this simple-and-beneficial solution.

“By prodding China’s citizens to spend more, the country’s leaders say their goal is to decrease the nation’s dependence on exports. If China’s consumers, who currently save 50% of their incomes, saved less, more of the nation’s production output would be consumed domestically and China would be much less vulnerable to downturns in its overseas export markets.

“Without a vibrant domestic market, over-leveraged Americans will apparently remain China’s most important customers.”