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International Law

: China Hearsay

Inflation Confusion

By Stan

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Just read a UBS report yesterday on China macro issues. The article was written by Jonathan Anderson back in mid-February. Sorry I can’t link to it – not public info.

Anyway, Anderson was talking about RMB revaluation, but as part of that discussion went into some detail about inflation. He said, in part, that inflation was not as big of a worry (in a macro sense) as some of us think.

This got my attention – I’ve been panicking about inflation and the economic and political fallout for months now. But Anderson pointed out that non-core CPI in China, as of the end of December, was pretty much OK, and the food increases are chiefly due to price hikes on meat and eggs. Moreover, expected spikes due to the snowstorms are limited events.

When you live somewhere that is experiencing significant price increases in food, you tend to make certain assumptions. Certainly I have seen some dramatic rises in the past several months – all you have to do is go to a restaurant or supermarket once in a while. The price hikes have been speedy and sharp recently and have spread to food products in general. I always figured that this was part of a bigger inflation picture, though. Is it?

Bloomberg had this story out yesterday (along with everyone else), reporting that inflation in February will surge to an 11-year high. However, if you look at the Bloomberg article, it points to the snowstorms as the big culprit, which is a temporary situation. Moreover, Anderson’s basic premise is supported:

“If you take out food and energy prices, inflation remains about 1 percent,'’ said Tang [Paul Tang, economist at Bank of East Asia in HK]. “So there are worries, but there’s still a lack of evidence that inflation has spread to become a general problem.'’

Others seem to disagree, and the PPI numbers that were released yesterday seem to have a lot of people nervous (Michael Pettis discussed this yesterday). The question is whether the fundamentals that Anderson was looking at less than a month ago have changed. A lot of commentators evidently think so. The new CPI numbers come out later today.

However, it still seems like a lot of news out there is tying the econ story with the socio-political story. When food and energy prices go up, governments get very nervous, as they should; this usually spurs them into action, for better or worse. The hard part is separating the "people need affordable food" story from a good analysis of the overall state of the economy and what the current underlying problems really are. As I read more and notice more disagreements in the press (and get more confused), I have a feeling that this is not being done all that well.

Full post as published by China Hearsay on March 10, 2008 (boomark / email).