Category Archives: inflation

“Inflated Notions”

Patrick Chovanec has been writing posts defending comments he made on Bloomberg News last week, essentially calling China’s official growth numbers into question. From his most recent piece:

My first assertion is that the decrease in China’s consumer inflation rate (CPI) — 3.6% in March, down from a peak of 6.5% last July — does not seem to accord with my own daily experience of rising prices in China. On Bloomberg I offered, as a counterpoint, the fact that the price of the fresh milk I have delivered to my home had, just that weekend, risen by 33%, from 6 yuan/bottle to 8 yuan/bottle.

Now I want to be clear that I am not claiming consumer inflation in China is actually running at 33%. I’m simply offering an example of the kind of head-turning price hike that remains an all-too-frequent experience despite the government’s declared “success” in getting inflation under control.

Some have suggested that the price increases I’m seeing reflect a higher rate of inflation in Beijing than elsewhere in China. That’s certainly possible, but it doesn’t help reconcile them with official figures. According to the official CPI numbers for February, inflation in Beijing stood at 3.5%, barely above the national figure of 3.2% for that month.

None of this necessarily means the National Bureau of Statistics (NBS) is lying, or making up numbers out of thin air. CPI is calculated based on a basket of goods, the exact composition of which is not disclosed by Chinese authorities, although some analysts have done a decent job of trying to re-engineer it. I’m sure you could come up with a basket that shows consumer inflation at 3.6%. Whether that reflects what consumers are actually feeling, though, is another matter. The picture is complicated by the fact that the government knows what is in the basket and can target those items for price controls and other forms of intervention. That keeps the prices for the select items — and the index — down, for a while at least. But it doesn’t solve price pressures, it only distorts their impact on the economy.

Now that the monetary expansion has peaked, and China’s investment boom is slowing (more on that in a moment), one would not be surprised to see prices dropping — even collapsing — as a result of the inflationary bubble popping. In fact, that is precisely what we are seeing in property and property-related inputs. The -0.3% drop in the Producer Price Index (PPI) matches up well with the the industrial slowdown I’m seeing. We may yet see a downturn in wages if that slowdown continues or deepens. But for a number of reasons, including people cashing in inflated assets, as well as the bottled-up pressure from earlier price controls, the everyday cost of living continues to rise. That suggests that inflation is turning into stagflation, a problem that places serious constraints on the Chinese government’s ability to pump money in to reignite growth.

There is no way to definitively prove that prices in China have risen, and continue to rise, faster than official CPI indicates. One could, of course, devise a transparent basket of one’s own and collect independent price data from cities across China. But the Chinese government strongly discourages such projects, to put it mildly. Absent an alternative measure, we are left with impressions and pieces of data.

More as he posts them.

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“China’s inflation trap”

The always-excellent Peking Duck on the future of the Chinese economy:

We’ve seen all kinds of warnings over the years about China’s economy. Several years ago it was all the rage to talk about the “hard landing” China was in for after so many years of growth. Never happened. The banks were going to implode and drag the country down. Never happened. The property bubble was going to pop. Hasn’t happened yet (though I think it’s inevitable). Doom and gloomers also made the general prediction that China’s collage of overwhelming problems — the environment, corruption, local unrest, the class divide — would all contribute to “the coming collapse of China.” It was imminent. I thought so too, back in the earlier days of this blog. Yet China keeps on going, the same existential problems dragging on it like shoes stuck in tar. And yet it keeps going.

Since so many “experts” have been so wrong for so long about China’s economic downfall, it’s risky to point to yet another calamity and say it could bring things crashing down. Maybe the effects of inflation won’t go that far, but I’m not so sure.

Just about nothing is as catastrophic as rampant inflation. A deflationary depression is the only thing worse, but they’re pretty close. As prices inflate, your money can be turned into confetti before your eyes. And it forms a vicious vortex as everyone demands more pay which only fuels higher prices and rents, and one thing feeds on another and the catastrophe spirals out of control.

My own amateur opinion mirrors what I recently read in this superb post that is too complex and detailed for me to quote from, but that should be read by all. The bottom-line prediction: things will continue more or less the same, with a sharp, painful drop in property prices at some point and a steady decrease in GDP as domestic consumption fails to live up to expectations and deficit spending clogs China’s economic arteries. As always, we’ll just have to wait and see.

In the meantime, my heart goes out to the Chinese people. Inflation is devastating, and I hate to think of how many decent people are going to see much of what they worked for washed away.

One thing- one of the links he provides claims that a severe slowing of the growth rate won’t lead to increased social instability. He provides Japan as an example, but I think the contrary examples provided by many North African and Middle Eastern countries this year might provide a more accurate model of what could happen here.

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“Pigs at front line in China inflation battle”

Pork is serious business here in China. Considered the standard, the staple meat of the country, pork is what you get if a restaurant menu says “meat” but doesn’t specify which animal. Rising food prices have hit pork as well as everything else, leading to slightly surreal quotes like this one, from a Financial Times story on the subject:

“A stable pork market is the government’s unavoidable responsibility,” declared Wen Jiabao, premier, on a recent countryside visit, adding that pork was a “firmly fixed consumer necessity of the masses”.

Ahahaha, look at that quote! It’s beautiful. I hope that kind of language catches on internationally, because I can’t wait until the day Obama solemnly declares Doritos and funyuns a fixed consumer necessity of the American masses. On a more serious note, though:

The Chinese are among the world’s top pork consumers, tucking away some 37kg per person each year. That appetite, which has grown hugely in recent years as Chinese have grown more prosperous, means pork prices figure prominently in calculating monthly consumer price inflation. In June, pork prices were the single biggest driver of food inflation, which hit 14.1 per cent, and contributed 140 basis points to headline consumer price inflation of 6.4 per cent.

China’s pig prices are susceptible to a boom-and-bust cycle that has seen prices fluctuate wildly in recent years.

This year pork prices have been driven to record highs as a result of a fall in the number of pigs being bred. Because of low pork prices last year and rising prices for feed, some small farmers – who account for about 40 per cent of total pork production – decided not to raise pigs at the start of this year.

Many analysts believe pork prices will soon peak. And after nearly a year of interest rate rises, falling pork prices could give Beijing room to loosen monetary policy and ease fears of a sudden slowdown.

The government has tried to calm pork markets by releasing reserves of frozen pork into the market, although the amounts released have been too small to have a significant impact. Despite these efforts, small pig farmers complain that raising pigs has simply become too risky.

This is what happens when a billion Chinese jump sit down and eat some dinner.

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