A WSJ article reporting on comments by Chinese Premier Wen Jiabao noted his concerns about inflation. Later it discussed the possibility that China would increase the value of the yuan. Remarkably, it never noted that raising the value of the yuan would reduce import prices and therefore offset inflationary pressures. For example, if the yuan were to rise by 20 percent against the dollar and other currencies, then as a first approximation oil and other import prices would fall by 20 percent. (The actual decline will be somewhat less, since China's demand for imports will increase putting upward pressure on prices.) This decline in import prices would go far towards stemming inflation, therefore a higher valued yuan would be an obvious response to concerns about inflation.
--Dean Baker
