Focus on the real

Oct 26th 2010, 12:17 by R.A. | LONDON

HERE'S an interesting piece of analysis:

In nominal terms, the yuan has strengthened about 2.5% since China's June 19 decision to ease its currency policy. That works out to an annualized rate of nominal appreciation of almost 8%. The simplest way to calculate real appreciation is to add on the difference between China's inflation rate (3.5%, according to August data) and US inflation (about 1%, or even less if the dip in the September figures holds up). Doing so gives us an annual rate of real appreciation of more than 10%. Two or three years of that would pretty well eliminate the 20 to 40% undervaluation that critics are talking about.

As Tyler Cowen says, what you're really interested in is the inflation rate for tradable goods, but the point is still a good one. China's inflation rate (and, almost certainly, its rate of wage growth) is well above America's. That's just as important in determining export competitiveness as movements in the nominal exchange rate.

economist.com/blogs/freeexchange