China's Changing Inflation Keeps Swine Fever Infection at Bay
(Bloomberg) -- A surge in the price of pork in China due to African Swine Fever is having less of an effect on inflation than it once would have, helping the central bank keep monetary policy supportive.
New research by Bloomberg Economics shows that the influence of food prices in general is declining, as the nation becomes wealthier and spends a greater share of income on other things. While the Consumer Price Index used to be jokingly called the ‘Consumer Pork Index,’ that’s less accurate these days.
That fact isn’t immediately obvious though to observers watching headlines about the spread of pig disease, partly because the National Bureau of Statistics doesn’t release the exact composition of the basket of goods through which it measures price gains.
Data released Wednesday showed a tick up in inflation to 2.7 percent from a year earlier last month, a 0.2 percentage point increase since April. But that level is still well within the comfort zone of the People’s Bank of China, which sets a 3% ceiling, and economists forecast gains over the whole year to be lower due to the weaker economy.
An almost 20 percent jump in pork prices hasn’t fed through much to overall inflation. Food now has a much lower weighting in the basket compared to around 30% in 2015, according to new calculations from David Qu at Bloomberg Economics in Hong Kong. And pork itself is now only about 2.5% of the basket, he says.
According to Qu’s calculations, a 50% rise in pork prices would now only raise headline inflation by 1.2-1.3 percentage points. Vegetable prices fell in May from April and while fresh fruit prices are at a historical high, that could subside in the summer as supply increases, according to Lu Ting, chief China economist at Nomura Holdings Inc. in Hong Kong.
So even if pork prices may rise further in the second half of this year as some expect, that won’t be enough to cause above-target inflation and warrant a response from the central bank. The PBOC is seen keeping all the major interest rates unchanged through the end of the year, according to a Bloomberg survey from last month.
Nomura’s Lu says he expects headline CPI inflation to go above 3% in some months this year, but it may impose little pressure on the PBOC’s monetary stance.
“Overall CPI would be more about domestic demand and economic fundamentals -- we now see China’s economy is slowing and domestic demand is subdued, so there is no driver for inflation to get faster,” according to Tang Jianwei, a Shanghai-based economist at Bank of Communications Co. “Problems on the food supply won’t bring in a new round of high inflation.”
However, consumers may not see it that way, with prices of pork, fruit and vegetables all rising at double-digit rates recently. One issue that is common in many countries including China is that what consumers see in their everyday lives is scarcely reflected in the top-line data.
Another issue is that in the minds of consumers, rising prices are much more memorable than falling ones, said Tang at Bank of Communications.
“Maybe the consumers would feel, for example, the big jump in fruit prices, but its weighting in the basket is too small to move the needle,” according to Tang. “The costs of telecommunications and internet dropped hugely over the past few years, but people tend to overlook the fact.”
Are China’s inflation statistics colored by doubts about information accuracy that affect other indicators? A cross check of the National Bureau of Statistics’ official index with an alternative one released by Tsinghua University, which takes prices on a daily basis from online commerce websites, reveals close correlation.
Of course, economists and analysts always want more data, with many calling for the weighting information to be publicly released. But for now, the existing data says that inflation is low, and likely to stay that way.
--With assistance from Miao Han, Yinan Zhao and Kevin Hamlin.
To contact Bloomberg News staff for this story: James Mayger in Beijing at firstname.lastname@example.org
To contact the editors responsible for this story: Jeffrey Black at email@example.com, Sharon Chen
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