Chinese consumers reported a sharp spike in living costs in May, complicating the policy challenge for a government already trying to contain the impact of a deepening trade war with the US while managing a structural economic slowdown.
The threat of surging consumer inflation has reared largely because of the failure of the authorities to tackle a fatal disease that has devastated the country’s swine herd,
Further increases in the price of pork could stymie efforts to use monetary policy to support growth but a weakening economy and the simmering trade war remain the greatest threats for policymakers — it is likely that they will continue tinkering with price measures to smooth inflation.
Urban Chinese consumers estimated their cost of living was 8.6 per cent higher in May than the same month last year, and that it will rise another 8.3 per cent over the next six months. Both readings were the highest since the start of 2014 and compare with the official measure of consumer inflation, which hit a six-month high of just 2.5 per cent in April (official May CPI is scheduled for release on June 12).
Consumers appear relatively unaffected by the increase in prices so far. Our read of their discretionary spending increased slightly in May, even as views of their household incomes and the state of the economy were less positive. Despite the gloom surrounding the escalation of Sino-US tensions, our headline consumer index only edged down to 73 in May, slightly above the 72.4 average of the previous 12 months.
The threat of broader inflation may be contained for now. Even as pork drives up the official inflation reading, non-food prices have weakened on the back of slower economic growth, while the producer price index — a measure of factory gate inflation — is again threatening to turn negative.
If pork prices rise too quickly, consumers will switch to other meats and proteins, though official data suggest this has yet to happen. Vegetable and fruit prices have also been rising sharply, helping push up the index, though this unlikely to be sustained. An index of prices from the vegetable wholesale market in Shouguang, Shandong province, China’s biggest, shows that vegetable prices are already falling. Fruit prices, which rose on the back of a sharp frost last winter, may continue increasing over the coming few months but their rise should abate as inventory improves.
The price of pork will remain a concern because Chinese people eat so much of it — 30kg per capita per year — and because of its historical influence over headline inflation. An outbreak of respiratory disease among China’s swine herd in 2007/08 drove the CPI up nearly 9 per cent. The Communist party is acutely sensitive to rising prices — inflation helped undermine the nationalist government in the 1940s and was among the grievances that fuelled the Tiananmen Square protests in 1989.
Headline CPI is still below the annual 3 per cent target and, in
In the event of a further spike, tightening monetary policy would do little to tackle a shortage of healthy pigs and could instead hurt broader economic growth (tighter policy could help support a weak renminbi, but the government would
Instead, the weighting of pork in the inflation index could be lowered even more to keep headline CPI under control. An estimate of basket weightings according to monthly changes in the CPI suggests they are adjusted to keep headline inflation readings under control. Based on limited disclosures from the National Bureau of Statistics about what drives month-to-month changes in the CPI, we estimate that pork accounted for just 2.15 per cent of the basket used to measure consumer prices in April, its lowest weighting on record.
All things being equal, even if pork prices rose 80.9 per cent — to the peak of the 2007/08 cycle — lowering pork’s weighting in the basket to 1 per cent would keep headline inflation at the official annual target of 3 per cent.
One risk is that overtly tampering with the basket weightings would further damage the credibility of the government’s inflation index as an accurate measure of price movements. The estimates provided by consumers in our survey suggest they think prices are rising more than three times faster than the rate suggested by the official index.
However, given the sensitivities of this year, risking the CPI’s reputation is a more palatable option for the government than being seen to fall short on a key plank of economic management.
The FTCR China Consumer survey is based on interviews with 1,000 consumers nationwide. For further details click here. This report contains the headline figures from the latest Consumer survey; the full results are available from our Database.
FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and south-east Asia. Our team of researchers in these key markets combine findings from our proprietary surveys with on-the-ground research to provide predictive analysis for investors.