China's inflation problem

Producer and consumer prices are diverging - which could spark trouble in the future.

China’s economic data have long been looked upon with a hint of suspicion. Inflation data is considered to be one of the better economic indicators produced by the China’s National Bureau of Statistics, however, recent outcomes have raised some questions. The producer price index (PPI) is considered to be a relatively reliable leading indicator of the consumer price index (CPI), as upstream price pressures, including the effect of higher commodity prices and raw materials, eventually trickle down and feed through to consumer prices. History has shown that it is broadly the case for China, with the CPI and PPI moving roughly in line with each other.

However, comparing the recent inflation outcomes at the consumer and producer level suggest a wide divergence in price pressures: rising consumer prices and falling producer prices in annual terms. The PPI has trended sharply downwards over the past year, down in deflationary territory for two consecutive months in April, while consumer prices have moderated more slowly. Growth in the CPI was 3.4 per cent in April 2012, moderating from a high of 6.5 per cent in July 2011, while the PPI which measures the selling price of goods and services sold at the wholesale level fell by 0.3 per cent in annual terms down from 7.5 per cent annual growth.

To some extent, the large recent falls in the PPI relates to a base effect; previously strong monthly increases in the index in late 2010 to early 2011 would reduce the magnitude of change in the index this year. But looking at the index rather than the growth, producer prices have also been subject to deflationary pressure in monthly terms – causing the index to fall slightly in late 2011, before more recently picking up.

The moderation in the PPI also reflects slackness in the manufacturing industry, where prices in the sector have fallen in annual terms for four consecutive months to be lower by 2.2 per cent in April 2012 compared to a year ago. This is in line with the continued moderating trend in industrial production, down to below 10 per cent annual growth in April – representing the weakest growth since the 2008-09 slowdown. Meanwhile, consumer prices have been driven largely by high food prices, which accounts for around one-third of the consumer basket.

The divergence between consumer and producer prices also highlights different operating conditions for upstream and downstream manufactures. Input prices have risen significantly, suggesting that profit margins for upstream manufacturers are taking a hit. Commodity prices have remained elevated; wage pressures have intensified with minimum wages rising by around 20 per cent annually in many provinces, while exchange rate appreciation has also cut into manufacturer’s profit. Anecdotes suggest that many exporters are declining large overseas orders, given the lack of skilled workers, tight credit conditions stemming from the government’s ‘prudent monetary policy’ and uncertainty over the pace of renminbi appreciation.

On the other hand, however, downstream manufacturers, which are less vulnerable to higher input prices, appear to be experiencing an improvement in their profit margins due to the positive gap between consumer and producer price inflation. Looking at reported profits across industries, consumer-related sectors appear to be best performers. In the three months to March, profits of automobile manufacturers increased by 6.3 per cent annually, while profits in the sectors of raw chemical and chemical products fell by 23.1 per cent and even further for ferrous metal mining and processing (down 83.5 per cent).

Looking ahead, it is expected that the gap between producer and consumer prices will eventually close in the coming months on the back of an improvement in manufacturing demand and possible relaxation of government credit restrictions. As per the government’s inflation target, consumer price inflation is set to average 4 per cent in 2012, which would mean relatively strong monthly growth of around 0.4 per cent over the remainder of this year. Should this be achieved, producer prices will need to rise at a much faster pace in accordance with the consumer and producer price relationship.

Until the figures get back on track, it is not unreasonable to expect the concerns felt in many countries about the accuracy of inflation numbers might well spread to China. Trying to get representative prices for a basket of goods that reflects the experiences of the majority is increasingly hard in complex economies prompting many to question the accuracy of one of the most important economic variables.

Chinese workers assemble electronics. Photograph: Getty Images

Niloofar Rafiei is China economist at Timetric, provider of economic data visualisation and analysis.

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No, David Cameron’s speech was not “left wing”

Come on, guys.

There is a strange journalistic phenomenon that occurs when a party leader makes a speech. It is a blend of groupthink, relief, utter certainty, and online backslapping. It happened particularly quickly after David Cameron’s speech to Tory party conference today. A few pundits decided that – because he mentioned, like, diversity and social mobility – this was a centre-left speech. A leftwing speech, even. Or at least a clear grab for the liberal centre ground. And so that’s what everyone now believes. The analysis is decided. The commentary is written. Thank God for that.

Really? It’s quite easy, even as one of those nasty, wicked Tories, to mention that you actually don’t much like racism, and point out that you’d quite like poor children to get jobs, without moving onto Labour's "territory". Which normal person is in favour of discriminating against someone on the basis of race, or blocking opportunity on the basis of class? Of course he’s against that. He’s a politician operating in a liberal democracy. And this isn’t Ukip conference.

Looking at the whole package, it was actually quite a rightwing speech. It was a paean to defence – championing drones, protecting Britain from the evils of the world, and getting all excited about “launching the biggest aircraft carriers in our history”.

It was a festival of flagwaving guff about the British “character”, a celebration of shoehorning our history chronologically onto the curriculum, looking towards a “Greater Britain”, asking for more “national pride”. There was even a Bake Off pun.

He also deployed the illiberal device of inculcating a divide-and-rule fear of the “shadow of extremism – hanging over every single one of us”, informing us that children in UK madrassas are having their “heads filled with poison and their hearts filled with hate”, and saying Britain shouldn’t be “overwhelmed” with refugees, before quickly changing the subject to ousting Assad. How unashamedly centrist, of you, Mr Prime Minister.

Benefit cuts and a reduction of tax credits will mean the Prime Minister’s enthusiasm for “equality of opportunity, as opposed to equality of outcome” will be just that – with the outcome pretty bleak for those who end up losing any opportunity that comes with state support. And his excitement about diversity in his cabinet rings a little hollow the day following a tubthumping anti-immigration speech from his Home Secretary.

If this year's Tory conference wins the party votes, it’ll be because of its conservative commitment – not lefty love bombing.

Anoosh Chakelian is deputy web editor at the New Statesman.