I am traveling in Shanghai today so it is not easy for me to post a long entry.Of course a lot of interesting numbers were released today.The only comment I have time to make today is on the CPI numbers.
As expected CPI inflation came in at 8.3% year on year.This implies that prices declined by about 0.7% during the month of March.It also implies that inflation for the first quarter of 2008 is running at 12.9%.
To me the most significant thing was the high level of food inflation – 21% – combined with the rising level of non-food inflation.I calculate that in January non-food inflation was 1.6%, it rose to 1.8% in February and to 2.2% in March.
This rising inflation in the non-food sector, even though it is still under the PBoC target of 3%, is completely inconsistent with the argument that China is only experiencing a temporary food-supply problem.Food prices rising at 21% annually should put brutal downward price pressure on non-food items if the inflation target is credible – that is if PBoC monetary policies are consistent with the target.
The fact that not only is there inflation in the non-food sector, but there is accelerating inflation, indicates to me that the inflation target is not remotely credible.Another one or two months of rising non-food inflation will be enough, I think, to settle the matter once and for all.
I've found that usually expressing something in terms of either/or usually can be misleading as far as understanding the dynamics of a situation.
One question that puzzles me is why are food prices rising at all. It's clearly not a China only phenonmenon, since it takes a lot of explaining to figure out how RMB policy affects the Middle East. How the supply shock is hitting China is affected by the peg and monetary policy, but there is something else going on.
One question I wonder is if a lot of the money that was taken out of mortgages somehow found its way into wheat and grain prices, and so that the jump in food prices is related to the subprime mortgage crisis.
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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Comments (1) for "Non-food inflation is rising"
- 4/16/2008 9:38 PM
January, 2008