China PMI: Misleading About Inflation

China’s purchasing managers’ index was 52.9, according to the China Federation of Logistics and Purchasing. The figure was the lowest in a half a year, and was below most expectations.

Analysts say that the number shows that inflation has begun to slow China’s economy. What most do not say is that the figures are certainly misleading. There is a growing suspicion that the People’s Republic masks the rise in prices, either intentionally or because its data collection mechanisms are unsophisticated.

The PMI has a sub-index which is supposed to be an indicator of inflation. This number was 69.3 last month, but was below a recent peak of 73.5 in November.

The theory behind the slowing PMI and rising inflation indicator is that rising prices mean that factories are paying higher wages and face higher costs of goods like oil and metals. This, in turn, makes Chinese goods more expensive to trade partners and will eventually affect the balance of trade.

China’s effective rate of inflation is around 5% if the country’s data is taken at face value.

Institutional investment website Zerohedge recently posted that there is anecdotal evidence that rent and food prices are rising by double digits. The Wall Street Journal recently made the case that inflation numbers reported by major nations are not trustworthy.

There are essentially two worlds of inflation. There is the world in which the cost of some goods and services are rising very little. This is true of PCs and other consumer electronics. It is also true in the case of many mid-priced cars because customers are able to chose from many competing brands. This may be as true in China as the US. China’s market is awash in both foreign and local manufacturers.

Economists must tease out of the Chinese data what consumers must pay for their basics. This certainly includes food and fuel. There is no question that global prices of nearly all agricultural commodities and oil are rising. China’s demand for these things is probably larger than in most other nations due to the rise in middle class wages and the need for the People’s Republic to import many goods.  China became the world’s largest net importer of oil last year. Its farms do not create enough grain and beef to  supply the nation’s 1.3 billion people.

There is a great deal to show, on close examination, that China’s inflation problem is more severe than the high level reports from the government.  That means China’s trouble with export prices is more critical to both it and the nation’s that rely on its exports.

Douglas A. McIntyre