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China Inflation: Getting Worse and Coming To A Wal-Mart Near You
By Dian L. Chu, EconForecast
On Tuesday Feb. 15, China reported its consumer prices (CPI) rose 4.9% year-over-year (yoy) in January, which came in less than expected. Economists were expecting 5.4% inflation, based on a Bloomberg survey.
However, after digesting the data, Asian markets closed mixed on that news, with China’s Shanghai Composite staying flat after a choppy trading session.
Well, the reason why markets reacted that way is because the lower figure is partly the beneficiary of a previously announced change--effective January 2011--in the weight of items included the CPI basket calculation.
Index Calculation Change
Food previously accounted for a third of the index calculation and was the main driver of inflation last year. According to Blomberg, National Statistics Bureau (NSB) said that a reweighting of the CPI, including cutting the contribution from food, boosted the headline rate by 0.024%.
Bloomberg quoted Mizuho Securities Asia Ltd. Saying that the CPI calculation shift effect is more like 0.2%. That is, without the change, the CPI may have been 5.1%.
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Manwhile, NSB said the Producer Price Index (PPI) spiked 6.6% yoy in January after escalating at 5.9% in December. The component calculation of the PPI also has been revised, including an addition of about 2000 products to the basket and adjusting the weightings.
The change reduced January’s yearly PPI inflation by 0.05%, which means the index would have seen an increase of 6.65% without the basket change.
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Spilled Over to Non-food
Chinese statistic bureau did not disclose a breakdown of the basket for either index. So, the alterations made it quite impossible to directly compare the January data on an apple-to-apple basis to earlier months. Nevertheless, there are still plenty of clues.
First of all, it is evident that there's now a broadening escalations spilled over to non-food items as well. Core inflation, stripped of food, rose 2.6% yoy, the highest in at least a decade after rising 2.1% yoy in December.
Residence costs jumped 6.8% from a year ago, the most since August 2008. Not to mention food prices soared 10.3% after rising 9.6% in December - Grain escalated 15.1%, fresh eggs climbed 20.2%, and fruit spiked 34.8% from a year ago, according to the official report.
Previous Tightening Not Enough
Regardless which way you calculate, January also marks the fourth straight month that the inflation has exceeded Beijing's 4% target. This clearly illustrates measures taken by the Chinese government, e.g., multiple interest rate hikes, raising bank reserves requirement, and letting Yuan appreciate, have not been enough to control surging prices.
Furthermore, I personally prefer PPI as an inflation predictor and indicator, as it shows the coming pricing pressure that could be passed down through the supply chain. And the current reading of 6.6% just further supports the view that China’s inflation is far from being under control.
Feed the Inflation
China’s inflation problem could be attributed mostly to the over abundant money supply, increasing domestic demand from a growing middle class, and bad weather hurting food supplies. On top of these existing culprits, China may also increase retail gasoline and diesel prices to reflect higher international crude prices, People’s Daily said Feb. 11. China last increased fuel prices by around 4% on December 22.
Moreover, the worst drought in 60 years hitting China northern “wheat belt” will only putting more upward pressure on the already rampant food price inflation, although Beijing so far has downplayed it.
Increasing Input Costs
China’s money supply surged 48% in two years (which is not that different from the U.S. Fed’s QE), the flood of liquidity has been used mostly to speculate on commodities/raw materials instead of stimulating consumption.
As traditional industries, such as steel and textile, are hurting from rising input costs, the most alarming sign is the widening gap between PPI and CPI. This suggests producers and manufacturers have not been able to pass through the cost increase.
Eat, Pass Through
So, eventually these companies most likely will eat some of the cost increase, which means shrinking margins, while exporting some more to their clients in Europe and the U.S. And the companies that import goods from China will face the same dilemma --absorb or pass through the price increase.
Since China’s economy relies heavily on manufacturing and traditional industries, the implication of lower profitability could pose a serious problem for many companies, and China’s economic growth.
No Way Out
The importing countries, meanwhile, will likely also suffer from lower corporate margins and high consumer inflation. The United States, a net importer with China in the supply chain of many corporations, will feel that inflationary pain all the way from this side of the Pacific Ocean.
Even if the U.S. switches to importing from other trading partners, it will not make much of a difference, as other emerging economies are also suffering from the similar inflation headache. For instance, India’s benchmark wholesale-price index rose 8.23% in January, Indonesia’s inflation is 7% and South Korea’s is 4.1%.
Coming to a Wal-Mart Near You
Many economists predict that China will likely be forced to take stronger measures that could slow economic growth. Reuters reported China may increase the bank deposit reserve ratio to 23% from the current 19.5%, and the People's Bank of China (PBOC) is also expected to permit the yuan to rise further, according to a report by the State Information Centre under the National Development and Reform Commission. Japan’s Mizuho Research Institute predicted in December that China may raise interest rates up to six times by the end of 2011 (one rate hikes in Feb. 2011 so far).
Regardless when or what China’s doing to rein in inflation, it no doubt will put a brake on one of the very few bright spots in the world. While China’s busy tightening and dealing with the once in 60-year mass drought, consumer price inflation, and diminishing margins will likely crop up pretty much everywhere from mass retailers like Wal-Mart, Target, to high tech products from companies such as Apple, Hewlett Packard, and Dell.
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Now it's "Chinese Inflation"... LOL!
The Chinese have been complaining for months & months about Uncle Ben's Instant Money exporting inflation to the rest of the world.
Globally we've seen big increases in $ denominated commodities - commodities China uses in vast quantities to produce what they consume & what they export.
Now it's worked it's way far enough thru the supply chains for average americans to notice it.
Yeah, it's "coming from China", but a significant portion of it is "coming home to roost".
"As ye sow, so shall ye reap".
But hey, spin all the blame onto China if you like. Ethics, responsibility & accountability are so out of fashion these days...
PS: Having lived through post Vietnam USA hyperinflation it is likely China hyperinflation is understated by a factor of ten.
China's rate of inflation is likely 5% per MONTH. Inflation in China is driven by the undergound economy which finances everything from manufacturing to office construction. This 'shadow banking' non- system sets the unofficial dollar/yuan exchange rate which prices the dollar higher -- after all, it has to. Manufacturers which gain most of the Chinese F/X sell dollars on the 'street' rather than to the PBOC. For manufacturers, the cheap yuan is a matter of survival. This forces the Central bank to compete w/ loan sharks: It adds more yuan into circulation (see sharp rises in SHIBOR) and competes with the underground economy for dollars. This competition adds inflationary pressure along with Chinese car- stupidity/petroleum gluttony and China's massive dollar reserves.
Chinese attempts to maintain the value (purchasing power) of her reserves is bankrupting the country. They simply have too many dollars. Trading dollars for any good drives the price of the good upward so they are stuck.
China's dilemma: they cannot increase interest rates because these attract even more dollars via carry trade. Nobody can match the implied interest rate -- what China needs to charge for money to quash inflation. Funds rates in the US @ 2% would annihilate US 'pseudo- recovery' while a Volcker- esque 19% funds (eqiv) rate would be required in China. Hello, carry traders!
Keep in mind there is no such thing as monetary policy when currency values are set by petroleum prices. The dollar is a hard currency w/ a defacto crude oil backing.
I wonder why Obama's rosy budget projections omitted the interest on the debt going forward 10 years. Aside from the fact that the proposed budget is one big gynormous fuckin' pile of disinformation, and they think we all are stupid, why was the interest on the debt eliminated from the numbers?
We will have to import some inflation from china as part of the great rebalancing. However the good part about this is that more expensive Chinese goods should help us eventually reduce our trade deficit with China. It will take $25 dollar hammers and 6 dollar starbucks coffees to get American manufacturing going again. Importing chinese inflation is just one more sign the rebalancing is continuing. I am tired of buying crappy Chinese products anyway.
I agree w/ Dian Chu. High prices will cause strains on margins everywhere including Chinese manufacturers. These are more vulnerable than real estate right now. Contrary to the talking heads on CNBC and elsewhere, shoppers are tightening their belts. Higher goods prices will tighten them further which will push back to manufacturers.
Chinese capital 'investment' in manufacturing capacity along with building space since 2008 is counterproductive as it will likely never be recovered.
Meanwhile the culprit behind the price rises is the 8- fold increase in petroleum prices since the supply- side heyday of 1998. A culture built around $20 crude oil is increasingly stranded by higher and higher prices. The question is what will break first and will it be systemically important?
Remember, the problem is @ the end of your driveway. It leaves you with a choice every morning: to drive or have a job.
The next choice is to drive or have a functioning economy. After that the choice is, to drive or have something to eat.
Man v. machine. Them or us.
steve, yes we tend to have gas guzzling SUVs and trucks. Even if we all converted to fuel efficient cars there is no way our dependence on oil would go away. In most places within the US, either you have a car to get to work and get groceries or STARVE.
You can see the next stage after a small round of imported chinese inflation. I think you are right. If it works out right then this will moderate price increases and helps with the great rebalancing. We have to suffer a little bit of chinese import inflation if we are ever going to get china to play fair with trade.
Communism is finally dead.
They've finally figured out how to #uck with the numbers like us capitalists, to make them say what they want.
Nope. No inflation here.
Whether its changing weather patterns or QE++++, inflation is on the march. Speaking of Marches, we are seeing the start of the perfect protest. millions of people from poor countries marching to the boarders of rich countries. Now its Italy. Tomorrow Millions of Mexicans marching to the Texas boarder. Why now Mr. President.
All you conspiracy theorists wondering about the huge number of unmarked busses and the huge number of reactivated but vacant government complexes in Texas don't need to worry that this is being done to round up americans. It is being done because the American government is well aware of a potential million person march to our borders if a catastrophe occurs.
tempo, I do not know where you live, but I live in Texas. We already have millions of Mexicans in Texas. They are everywhere. Mexico could take a few million back.
IF THE PRICE OF IPADS GO UP BECAUSE OF INFLATION, APPLE WILL GO UP EVEN MORE RIGHT?
right?
Well over a year ago I told all my friends to LOAD UP ON THOSE GREAT TOWELS that were marked down @ COSTCO. I had my shopping cart FILLED with bath towels (COSTCO has the best) ; they were a light blue color & because it was the end of the summer they were only $3.99 / towel !!!! ......... I grabbed at least 30 of them, enough towels for the rest of my miserable life, which isn't but another 20 years max.
I thought that margins for Chinese manufacturers were already razor-thin. If that is true, they will have to pass on most or all of the input cost increases.
As the new year ends chinese dragon starts breathing fire into Wal-Mart's bowels back home-sweet-home.