Chinese inflation decoded

As we know, Chinese inflation further accelerated in June.  The headline Consumer Price Index (CPI) rose 6.4% compared to a year ago, vs. 5.5% in May.  This is slightly above consensus estimate of 6.3%.

Less well understood, however, is how significant food prices are in this equation. Looking at prices in different categories, food prices inflation is the leading factor, rising 14.4% yoy in June, accelerated from 11.7% in May, while non-feed prices have only risen by 3.0% yoy vs. 2.9% yoy in May.  To put it bluntly, food inflation is out of control.  Unlike earlier this year when vegetable prices were leading the gain, meat products are the major category of food items which led the increase.  Meat products prices rose by 32.3$ yoy in June, rising from 24.3% in May, going  out of control as we know that pork prices have been on the rise.

On a month-on-month basis, the headline inflation rose 0.3% in June.  Food prices rose by 0.9% mom in June vs. –0.3% in May, but non-food prices was stable, rising 0%, vs. 0.2% in May.

In another note, the Producer Price Index (PPI) rose 7.1% yoy vs. 6.9% in May, slightly higher than consensus again.

If we take away food, inflation is modest.  In fact, there is no inflation whatsoever in non-food item if you look at the month-on-month figure.  In that sense, you can say that perhaps inflation in China is somewhat under control, but not if you include the food category.  Of course, the latest PMI figure shows that prices pressure may be easing, but the effect is yet to be seen on the CPI figure.

On the whole, it is very hard to claim with much certainty that inflation is under control.  The inflation report blames the so-called carryover effect, which means the the year-on-year figure shows acceleration not due to the latest price increases, but on inflation of the previous period.  If we look at non-food item, it is probably true, as inflation in non-food item is practically non-existent, but it is harder to tell as far as the food picture is concerned.

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  1. Thats OK china been buying ozzy farms to export food direct to china…how many billions does australia owe china?? food shortages might be coming to ozzyland.

  2. China’s headline CPI (including food) averaged 0.1% (monthly) for the last 4 months.

    Inflation “out of control” sorts need to argue that food prices will continue rising strongly from here to derive an “out of control” CPI over the next 6 months. Given many food prices have fallen in recent weeks/months (both in China and globally), we need new large negative supply shocks to get this outcome.

    If we don’t see more large negative supply shocks, China’s inflation will roll over in 2H11.

    • It doesn’t look like the CPI is seasonally adjusted, so the average of 0.1% for the last 4 months can’t be take in isolation. Compared to the same four months of the previous two years, that’s dire!

  3. USA does not measure food for inflation (nor housing). Is it conceivable then, that something similar is happening there?

  4. I suppose that their overstimulated economy puts more and more money in the hands of some people and also keeps the flow of workers from rural communities to cities where they find construction jobs paying more than what they were making in their farming jobs. While you can quickly ramp up your construction the same can’t be easily done with farming so more money in the cities drives up the price of food. Their “core” inflation is quite low since they are able to supply non-farm, especially manufactured products to cope with demand.