June CPI suggests inflation is moderating, but PPI tells a different story

As expected, the National Bureau of Statistics of China released a new set of economic numbers today. According to the release, CPI inflation year on year for June was 7.1%, its lowest level since January. It was 7.7% in May, 8.5% in April and 8.3% in March. On a month-on-month basis CPI declined by a little under 0.2% (following a 0.4% decline last month). This is more or less in line with expectations. The information is presented a little differently than it has been in the past, and I cannot back out the food and non-food components. I am hoping some cleverer analyst will be able to do so, but so far I haven’t seen anyone else provide a breakdown.

PPI numbers, also as expected, were much worse. PPI prices rose 8.8% year on year in June, compared to 8.2% in May, 8.1% in April, and 8.0% in March. I have already pointed out many times before that as the CPI numbers become increasingly tainted by price controls, more and more of us are looking at PPI to get a sense of underlying inflationary pressures. I think any sense of relief prompted by the continued decline in CPI inflation will be held in check by the frankly very poor PPI numbers.

On a related topic today’s Financial Times has an interesting article by Jamil Anderlini and Geoff Dyer with the rather worrying title “China on the brink of electricity shortfall.”

China faces its worst power shortage in at least four years as soaring coal prices and government-set electricity tariffs force dozens of small power plants to shut down rather than face mounting losses. Nearly half of China’s provinces have started to ration electricity as the country enters the peak summer season, facing what analysts describe as its worst coal shortage.

Analysts warn that this year’s electricity shortfall could be more severe than in 2004, when the country was affected by its worst power shortage in decades because of soaring demand for power as the economy boomed.

This is part of the problem with the inflation numbers. We are exchanging higher prices for shortages, and although one is as much an indication of inflationary pressure as the other, only the former shows up in the CPI and PPI numbers. These kinds of shortages (and there are many more) are masking very real inflationary pressures, but earlier experience, such as those of the US in the 1970s, suggest that shortages are only a temporary way to mask inflation. I expect price increases will have to occur soon.

In general I don’t think the numbers today are going to help the economic policy-makers reach any kind of firm conclusion one way or the other. GDP growth has slowed, according to today’s release, but a slowing to 10.1% growth in the second quarter (from 10.6% in the first), although slightly lower than expectations (and the lowest in three years), shouldn’t be enough to strike terror just yet., especially since, worryingly enough, fixed asset investment surged, by 26.8%, compared to 25.6% in the first five months of the year. This suggests that if the economy is moderating, it is not because of a decline in the overinvestment problem.

None of us really expected this batch of numbers to do much to clarify policy-making, and that is more or less what happened. That won’t stop the lobbying, of course. The Ministry of Commerce and its allies are stepping up the pressure to limit RMB appreciation, even though it is very hard to conclude from the numbers that Chinese exports are suffering because of currency appreciation. In fact export growth is remarkably strong given the slowdown in global demand and the high price of commodities.

I suspect the debate about whether or not to further “tighten” monetary conditions will also rage on. In his article on the data release Dong Zhixi in today’s China Daily put it this way:

These concerns may be part of the reasons why the finance committee of the National People’s Congress, China’s parliament, pledged on Wednesday to maintain its tight monetary policy for the rest of the year. However, watchers sensed a softening of words in its description of the fight against inflation. The committee said curbing price pressures would be a “prominent task” in the months ahead, instead of “top priority,” phrasing that economic leaders repeated in the early months of 2008.

Analysts believe policy makers are trying to find a balance between inflation and economy growth and are gradually shifting towards preventing a major economic slowdown.

In that context Bloomberg has an interesting article today, although it is a little hard to evaluate its importance. In a piece called “China Regulator Warns Against Further Bank Tightening”, the article says:

China’s banking regulator told policy makers that forcing banks to increase reserves has hurt the industry’s ability to repay debt, according to a person with knowledge of the matter. The People’s Bank of China raised its reserve ratio requirement to a record 17.5 percent last month to rein in loan growth and inflation. The China Banking Regulatory Commission has warned against ordering further increases, the person said, declining to be identified as he isn’t authorized to speak publicly on the matter.

China’s push to remove funds from the banking system resulted in the slowest loan growth in more than two years last month. The risk is that more banks will fall below the minimum requirement for short-term financial strength, the person said.

Amid all the economic data, the stock markets continue to be depressed. The SSE Composite drifted more or less steadily downward today, to close at 2685, down 0.78% for the day. So far I haven’t heard too much angry noise coming from investors, perhaps because last week was pretty good (up nearly 8%), but I did read with some dread a report on today’s Bloomberg that says “Pakistan investors stormed out of the Karachi Stock Exchange, smashed windows and cursed regulators after the benchmark index fell for a 15th day, the worst losing streak in at least 18 years.”


Originally published at China Financial Markets and reproduced here with the author’s permission.

One Response to "June CPI suggests inflation is moderating, but PPI tells a different story"

  1. akmi   July 18, 2008 at 12:48 pm

    Do you have an estimate of China’s actual inflation – sort of like Shadow Government Statistics for U.S. inflation?There’s a CPI-PPI gap in the U.S. too. Either there’s something wrong with how prices are measured, weighted and adjusted or retailers are aggressively discounting and squeezing profit margins. For some items, particularly those with low profit margins and high volume sales, such as fuel and food, cost increases have been passed on to the consumer.