Yesterday (this entry was written two days before I was able to get it published, thanks to the damned firewall) the prices of diesel and gasoline were raised by almost 10% and I believe the government is also planning raise the price of natural gas.This was the first price hike since May of last year.Obviously that should affect prices for a number of other products and services that are currently frozen, most obviously transportation and maybe electricity.According to NDRC, the gasoline price increase could push up headline CPI by 5bps, which suggests, using a rough back-of-the-envelope calculation, that gasoline prices comprise 5% of the CPI basket.
The real impact on inflation is not likely to be so easy to calculate.I guess there are at least three ways it can affect CPI prices.The first, and most obvious, is by increasing the direct cost of any product that uses oil in its production or transportation, which is to say the direct cost of almost everything.The second is its impact on profit margins – will rising costs force producers to squeeze their profit margins to maintain market share or will it force them to raise profit margins to protect themselves from increasing oil-price uncertainty?Finally it may affect inflationary expectations, which is probably the thing that most worries the authorities.
My guess is that the next set of high CPI inflation numbers will be dismissed as the consequence of another “one-off” price increase (like with food in earlier months) that won’t really matter for underlying inflation.The problem with this reasoning is that this particular increase is not a one-off reversible phenomenon but is rather the partial uncovering of previous hidden inflation.This wouldn’t matter too much if inflation were wholly a consequence of a temporary and reversible increase in food prices but, as I have explained elsewhere, I am not very comfortable with that explanation.It is still too early to say if we have seen a reigniting of inflation in China, but none of the numbers are comforting.
Two days ago I mentioned that oil had traded down from Monday’s record high of $93.80 to $89.75.Not for long.Today Bloomberg says it traded at $95.52.Rising oil prices are increasing demand for biofuels, which has also driven up the price for soybeans and corn.Bad news for China, but on the other hand wheat is up only a little after its biggest monthly fall in five years.
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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January, 2008
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