“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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Filed under economy, inflation

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