China’s Inflation Figures are Flawed

When China reports this week that the consumer price index rose at an annualized rate of about 6 percent in August, economists may say inflation has peaked. They said the same last year, when the C.P.I. was running half as fast. The problem isn’t bad forecasting: China’s headline inflation measure is flawed.

Headline inflation is easily bent by volatile prices. Take pork, which rose 57 percent year on year in July. Vegetable prices are increasing more than 5 percent a week, and the effect is magnified because food composes a third of the C.P.I. basket. Conversely, some prices are artificially low, like energy and transport. A ticket on Beijing’s subway has cost a flat 2 renminbi for three years.

China’s size creates another problem. While Shanghai urbanites lament the price of their lattes, farmers in the hinterland have different concerns. Perhaps it would be better to have one C.P.I. for the city and one for the country. New tailored bank rules for low-income Xinjiang Province make that not so far-fetched.

Finding the genuine inflation number isn’t easy. One insight comes with the difference between nominal and real reported gross domestic product, the so-called G.D.P. deflator. By that measure, 2010’s inflation was around twice the C.P.I.’s reported 3.3 percent rise. If that’s a guide, today’s inflation could be in double digits.

Savers, who are robbed by rising prices, are giving a strong signal. They have flocked to real estate and high-yielding wealth products to beat the measly 3.5 percent mandated one-year deposit rate. That makes inflation harder to fight, since money pushed into informal lending channels isn’t affected by monetary policy tools like bank credit quotas. Allowing deposits to be set by the market would draw more back into the banks. But the fear of eroding banks’ margins seems to stand in the way of what would be a potent inflation-fighting tool.

And then there are the dog whistles from politicians. Premier Wen Jiabao wrote in a state magazine on Sept. 1 that price stability was his priority, and warned of “unstable” conditions. Whatever the numbers say, when savers and politicians worry, investors should, too.


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