My Blog

December 10, 2007

The CPI numbers came in today, and as I expected they didn’t look good.  Most of the news services reported consensus expectations ranging from 6.7-6.9%, with the actual CPI inflation coming in at the high end – at 6.9%.  During the previous three months it was 6.5%, 6.3% and 6.5%, respectively.  Year to date prices have risen 4.6%, versus a target of 3%.  If we assume that 2007 inflation will be 4.7% for the full year, it will be the highest recorded number since 1996.

Food was up 18.2%.  Since major adjustments in the composition of the CPI basket occur only every few years, and minor adjustments only at the beginning of the year, food still officially comprises 33% of the food basket.  By now I would assume it must make up a larger share of the total basket than it did in January.  Raising food’s share by 10% to 36-37% of the basket adds about 0.5-6% to headline inflation.

Total inflation excluding food was 1.4%.  This may not seem like much, but it is the highest number all year, and substantially higher than the 1.1% last month.  What’s more, it suggests to me that we cannot take much comfort in the argument that inflation is primarily a one-off food problem.  If that were the case, we should see deflation, or at least disinflation, in non-food items, rather than increasing inflation.  I expect inflation numbers will not improve in the next few months and in fact will begin to spread into other categories as food inflation subsides.  By the way, I understand that there continue to be fuel shortages in parts of China, which increases pressure for reducing the fuel subsidy.  My understanding is that the NDRC is eager to convince senior authorities to approve more pricing deregulation, but I guess this will probably hinge on how well they are able to convince those authorities that inflation is just a food problem.

Here is one more reason to worry that inflation is likely to be sustained: the trade surplus for November, at $26.28 billion, was lower than October’s record $27.1 billion but still the third highest on record.  As such, it continues to act as a great source of monetary expansion.   

November’s trade surplus was 14.7% higher than last November’s trade surplus, and reflects a 22.8% rise in exports since last November and a 25.3% rise in imports.  The numbers are not good, but at least they are moving in the right direction in one sense.  Exports for the first 11 months were up 26.1%, versus imports, which rose 20.5%.  I don’t know if this is a seasonal effect, but it seems that later in the year import growth has sped up relative to export growth.

There is not a whole lot to say about any of these numbers because they do little more than confirm the story of the past three years: China is stuck in an expansionary monetary policy and nothing the authorities have done to extricate themselves has had any effect, nor is it likely to until they address the currency problem.  Most newspapers that reported today’s batch of numbers added that Chinese authorities announced last week that that China was switching its monetary policy from “prudent” to “tight”, but this announcement misses the point.  

China does not have a monetary policy.  It has an exchange rate policy, and as a consequence domestic monetary policy is largely a residual.  In one sense it seems to me that they are finally addressing the underlying monetary problem by encouraging capital outflows, but this is simply another, albeit more powerful, way to avoid addressing the fundamental problem.  Encouraging more and larger-scale outward FDI may take some pressure off the PBoC, but it runs the risk of pushing Chinese companies to invest outside of China before they are ready.

Comments (4) for "CPI is up 6.9%, trade surplu...

I cannot browse Chinese website now. But I heard that non-food inflation is driven by the rising fuel price. I wonder if you can break non-food inflation to non-fuel and fuel. By fatbrick - 12/10/2007 10:45 PM

i would bet the rise in imports (y/y) stems from low oil prices in q4 of last year v high oil prices in q4 of this year more than an underlying change in the import growth rate dynamic. there is also a base effect with exports -- by q4 of last year, the end of year pick up was fully in the data. but it is encouraging that y/y export growth has slowed to around 22% (off a very large base). 20% v 30% growth amounts to $100b by now! By bsetser - 12/11/2007 1:36 AM

yeah, the surging nominal import is highly correlated with CRB y-y change and indicating influence of commodities prices rather than China domestic demand Overall, export is still resillient, but how long can this last ? If export slowing with US Domestic demand while oil price high, could China trade surplus peak out 2008 ? By isaac - 12/11/2007 8:16 AM

Given the big price increase I wouldn't be surprised if high oil prices account for the differential growth. However I haven't been able to figure out the actual numbers and I am grasping for good news. By Michael Pettis - 12/11/2007 5:28 PM