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.

India Bourke
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Pegida UK: the new face of Britain’s far-right movement, and how to challenge it

“Let them drink tea,” Birmingham tells Islamophobes.

“Spooky,” is how Pegida UK – the latest branch of a global, anti-Islam, protest group  chooses to describe its silent march on the outskirts of Birmingham. 

“Islam is Nazism incarnate,” announces its new leader, Paul Weston, to a few hundred soggy, sober, brolly-clad protesters waving “Trump is Right” placards. 


Pegida UK protestors march through the rain. Photos: India Bourke

Such numbers are a far cry from the tens of thousands who attended the movement’s inaugural rallies in Germany in 2014, in response to the perceived “Islamisation” of Europe. And they would be derisory if the cheers Weston receives from his supporters weren’t quite so chilling, nor echoed so far.

For Pegida UK is not alone. From Calais to Canberra, thousands marched in the name of the movement’s toxic platform of anti-immigration and anti-Islam last weekend. I went to see the Birmingham rally to find out why such a protest is taking place in Britain.

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"Today is the first of many European wide demonstrations that will bring people together like never before,” Tommy Robinson, UK founder and ex-EDL leader, tells the assembled crowd. “It's planting the seed of something huge.”

Robinson hopes to exploit a gap within Britain’s far-right. Traditional groups are fractured: the British National Party was decimated at the last election, standing just eight of a previous 338 candidates. In its place, a swell of smaller, extremist bodies – from the Sigurd Legion to National Action – are pressing an ever more militant agenda. Pegida hopes to scale back the hooliganism in order to garner a wider appeal, but it shares these groups’ confrontation with Islam, and each may spur the other on.

“With Pegida we’re seeing the rise of a seminal new threat,” says Birmingham MP Liam Byrne. “In the rise of Isis and politicians like Donald Trump, you have forces determined to promote a clash of civilisations between Islam and the West. Pegida is trying to surf that wave and make sure it crashes on our shores.

Opponents hope the movement will suffer the same implosion that felled the BNP and EDL, with both leaning  too much on their leaders’ personal brands. Robinson certainly seems as adolescent as ever: laughing as he swipes away a photo of a scantily-clad blonde on his iPhone screen to show me the international Pegida leadership’s “hidden” Facebook group.

Their new apparently "suited and booted" middle-class following is also less than wholehearted. One pin-striped IT executive I speak to seems embarrassed by the whole affair: “I’m just a cowardly family man who can’t see a solution being offered by mainstream politicians. I’d be sacked if they knew I was here,” he says, declining to give his name. 


A Pegida protestor poses in front of the main stage.

As long as such hesitation prevails, Pegida UK will struggle. Still, there’s a sense more needs to be done to ensure its demise.

Matching protest with counter-protest is the traditional leftwing response, and this weekend saw thousands of Pegida opponents take to the streets across Europe. Yet, in some cases, direct confrontation can risk drowning out – even alienating – the very voices it seeks to win over.

“Smash the facists into the sea,” instructed the Twitter account of the North London Antifa group ahead of last weekend’s far-right, anti-immigration protest in Dover, where injuries were sustained by demonstrators on both sides.

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Instead, many now believe a better answer begins with that most British of pastimes: tea and a chat.

On the day before the Birmingam march, hundreds of the city’s cross-party leaders, religious figures and citizens gathered together at Birmingham Central Mosque to share their concerns over shortcake and jalebi.

“Groups like Pegida are parasites on the real concerns people have,” says John Page from the anti-extremism group Hope not Hate. “So we have to listen to these issues to close the cracks.

Initiatives around the city will attempt to take this approach, which sets a welcome lead not just for the UK, but Europe too.

The blanket smearing by groups like Pegida of Islam as a religion of sexist, homophobic Jihadi Johns places the burden of action disproportionately on the city’s Muslims. “It is our turn now to suffer these attacks,” says Mr Ali, Birmingham Central Mosque’s 42-year-old administrator. “It was the Irish, then the Jews, and now it is the time for us. But we are proud to be British Muslims and we will do what we can to defend this country.” 

A permanent visitors gallery, Visit-my-Mosque events, and publications that condemn Isis, are just some of the ways the community is challenging demonisation. It is even hosting a documentary crew from Channel 4 – a bold move in a city still reeling from Benefits Street.


Birmingham resident, Luke Holland, at a peaceful counter-protest in the city centre.

Mr Ali says: “The extreme right know nothing about Islam, but neither do many Muslim extremists.” The mosque is therefore in the process of formulating a “code of conduct”, making clear that hate speech of any kind is unacceptable.

"We have to help young people become the next Chamberlains and Cadburys and Lucases of this city," regardless of background, says Labour councillor Habib Rehman. Instead of letting them slip into despair and extremism of any kind, "we have to tell them: 'Yes You Khan!’”

Tea and talk is not the most dramatic response to Pegida’s claim it will have “100,000 decent people on the street” by the end of the year. But, in Birmingham at least – the city of Typhoo, where bhangra is as familiar as Bournville, and “No dogs, no Irish!” still sits heavy on the collective mind – tea, for now, means hope.

India Bourke is the New Statesman's editorial assistant.