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.

Getty Images.
Show Hide image

The problems with ending encryption to fight terrorism

Forcing tech firms to create a "backdoor" to access messages would be a gift to cyber-hackers.

The UK has endured its worst terrorist atrocity since 7 July 2005 and the threat level has been raised to "critical" for the first time in a decade. Though election campaigning has been suspended, the debate over potential new powers has already begun.

Today's Sun reports that the Conservatives will seek to force technology companies to hand over encrypted messages to the police and security services. The new Technical Capability Notices were proposed by Amber Rudd following the Westminster terrorist attack and a month-long consultation closed last week. A Tory minister told the Sun: "We will do this as soon as we can after the election, as long as we get back in. The level of threat clearly proves there is no more time to waste now. The social media companies have been laughing in our faces for too long."

Put that way, the plan sounds reasonable (orders would be approved by the home secretary and a senior judge). But there are irrefutable problems. Encryption means tech firms such as WhatsApp and Apple can't simply "hand over" suspect messages - they can't access them at all. The technology is designed precisely so that conversations are genuinely private (unless a suspect's device is obtained or hacked into). Were companies to create an encryption "backdoor", as the government proposes, they would also create new opportunities for criminals and cyberhackers (as in the case of the recent NHS attack).

Ian Levy, the technical director of the National Cyber Security, told the New Statesman's Will Dunn earlier this year: "Nobody in this organisation or our parent organisation will ever ask for a 'back door' in a large-scale encryption system, because it's dumb."

But there is a more profound problem: once created, a technology cannot be uninvented. Should large tech firms end encryption, terrorists will merely turn to other, lesser-known platforms. The only means of barring UK citizens from using the service would be a Chinese-style "great firewall", cutting Britain off from the rest of the internet. In 2015, before entering the cabinet, Brexit Secretary David Davis warned of ending encryption: "Such a move would have had devastating consequences for all financial transactions and online commerce, not to mention the security of all personal data. Its consequences for the City do not bear thinking about."

Labour's manifesto pledged to "provide our security agencies with the resources and the powers they need to protect our country and keep us all safe." But added: "We will also ensure that such powers do not weaken our individual rights or civil liberties". The Liberal Democrats have vowed to "oppose Conservative attempts to undermine encryption."

But with a large Conservative majority inevitable, according to polls, ministers will be confident of winning parliamentary support for the plan. Only a rebellion led by Davis-esque liberals is likely to stop them.

George Eaton is political editor of the New Statesman.

0800 7318496