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Tuesday, February 19, 2008

China Inflation January 2008

China recorded an inflation rate above 7 per cent in January – the highest in more than 11 years and providing evidence of entrenched inflationary pressures.
Consumer prices rose 7.1 percent in January from a year earlier, the statistics bureau said today, after gaining 6.5 percent in December. January's consumer prices climbed 1.2 percent from December.

Widespread expectations of a significant jump in retail inflation had been reinforced yesterday when manufacturing producer prices hit a three-year monthly year-on-year high of 6.1 per cent, mainly as a result of winter transport bottlenecks and higher commodity prices.

There are signs that global inflationary pressures have been fuelling higher ­Chinese food prices. Global prices for top-quality spring wheat - for example - have jumped by 90 per cent in the past six weeks, as corporate consumers have scrambled to secure supplies and speculators have bought stocks. The rising cost of pig feed is another example, and pork prices climbed 59 percent, edible oil 37 percent and vegetables 14 percent. Even more preoccupying is the fact that this process might now endure well into the year – creating a further headache for Chinese policymakers.

The breakdown of the CPI is also interesting, food, with a weighting of about 25%, is obviously important, and the price of foodstuffs increased 18.2 percent. Of this total, the price of grain was up by 5.7 percent.

On the other hand clothing was down by 1.9 percent year-on-year. The price of household facilities, articles, and maintenance services rose by 2.1 percent year-on-year. Of which, the price of durables rose by 0.7 percent, but household services and upkeep surged by 10.7 percent.

The price of health care and personal articles increased 3.2 percent year-on-year. The price of western medicines increased by only 0.5 percent, while that of traditional Chinese medicinal materials and medicines was up by 11.4 percent.

The price of transportation and communication dropped 1.1 percent, with transport alone dropping 2.9 percent. Communication prices fell by 19.6 percent. The price of recreational, educational and cultural articles decreased 0.3 percent. Of which, price of tuition and child care increased 0.5 percent; that of teaching materials and reference books dropped 1.3 percent; that of expenditure of culture and recreation increased 2.1 percent; that of tourism and outgoing was up by 5.1 percent; and that of cultural and recreational articles dropped 0.7 percent.The price of articles related to residence expanded 6.1 percent over the same period of the previous year. Of which, price of water (5.5%), electricity (5.7%) and fuels (4.7%) all up strongly.

Inflation has soared since last year on food and fuel costs, but it is important to note that wages were rising by a very rapid 22% on a national basis in Q3 2007, and a surging money supply increasingly poses the risk that these price gains may become self-propelling.

The threat of enduring inflation will add significantly to the pressures on Beijing to allow an even faster appreciation of its tightly managed currency. Food prices soared 18 percent after blizzards paralyzed transport systems and destroyed crops. The government faces the challenge of curbing inflation without derailing the expansion of the world's fastest-growing major economy

The renminbi, which has risen by about 13 per cent against the US dollar since mid-2005, has been rising more rapidly recently, in-creasing at an annualised rate of about 19 per cent in January.

As a result, China’s central bank is, technically, ­losing billions of dollars a month on the foreign exchange reserves it invests in US dollar instruments because it is paying higher rates at home on renminbi bank bills than it is getting in the US. The key one-year lending rate is 7.47 percent.

With interest rates on the back burner, a higher renminbi has become an important weapon for the government to fight inflation, by lowering import costs of oil and other commodities as well as soyabeans. Eighty per cent of soyabean imports are used for pig feed.

Although higher Chinese costs and currency appreciation will inflate its export prices, China is still importing inflation rather than exporting it at the moment, say economists.

“If anything, what is happening in the US is affecting China rather than the other way around,” said one ­Beijing-based economist is quoted as saying.

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