Either China’s Inflation Slowed, Or It Did Not

“China’s inflation accelerated in January as prices excluding food rose the most in at least six years, bolstering the case for more interest-rate increases to tame overheating risks in the fastest-growing major economy”. Bloomberg

“China’s inflation was lower than expected at 4.9 percent in the year to January.” Reuters.

Inflation in China is what the media and analysts make of it. There is the case overall inflation in the world’s most populous nation slowed based on the headline inflation rate.  An alternative argument is based on concern about rents, liquidity, and producer prices that rose.  Food prices were also much higher.

Producer prices will eventually be passed along to the consumer, so the producer number is a leading indicator which flashes a signal that the cost exporters have to charge for their finished goods will rise. This has a ripple effect within China because of its expanding middle class, where consumer spending is rising. Higher prices may hamper this behavior. The Chinese may return to the practice of saving and not spending. That could help mute inflation, if  export prices could be ignored.

China’s trade partners may find that the prices of exports from the People’s Republic have gone too high. That could put downward pressure on overall consumption in places like the US. Add the higher price of gasoline in America to that of imports and the US consumer may curb their spending. China’s inflation problem will ripple around the world.

No matter what the Chinese government says about inflation, it is impossible to make the case that it will not grow. China is the world’s largest importer of crude. The rising price of oil will eventually be passed along to gas prices, heating oil costs, and the petrochemicals used by Chinese industry. The central government may keep prices artificially low through subsidies. But, the government will eventually pass along the rise in crude in a gamble that it will slacken demand. The risk is that many Chinese cannot do without petrol-based problems which means there will be inflation in energy prices.

Some economists insist that a rise in the price of agricultural commodities will not push prices higher at the consumer level. That is not likely to be true in China. It faces huge crop shortages this year, mostly wheat production which has been damaged by 100-year droughts. The idea that the central government can somehow offset this with imports is absurd given the size of the Chinese population.

China’s inflation trouble may have been disguised by the new report, but the underlying trend cannot be kept out of the government’s numbers for much longer.

Douglas A. McIntyre