Like most people I have been looking at CPI inflation in China as a year-on-year number, which is the headline number most widely discussed and reproduced.The problem with this particular number, of course, is that it eliminates the sharp monthly fluctuations and smoothes out the data to such an extent that it is a little tough to figure out what is really going on.
Unfortunately it is not an easy matter to correct for this.As far as I know, the National Bureau of Statistics of China does not reproduce the actual CPI index when they release data.What it does every month is to give us the year-on-year change in the index, as well as the month-on-month change.These numbers are rounded to the nearest 0.1%.
In order to try to get a better understanding of the numbers I asked my assistant Shang Ning to retrieve all the year-on-year and month-on-month numbers for the past two years so that I could construct an index that closely mirrored the NBSC index.Because of their rounding of the data before releasing CPI figures, it required a little bootstrapping to do so, but I finally came up with a series that seems to approximate the NBSC numbers quite closely.
I list in the first two columns below, after the date, the month-on-month and year-on-year numbers released by the NBSC.In addition I annualize the monthly figure, so that we can compare it with the year-on-year figure and see what the real monthly level of inflation is.
Period
Month-on-month inflation
Year-on-year inflation
Monthly inflation annualized
March 06
-0.9%
0.8%
-10.3%
April 06
0.2%
1.2%
2.4%
May 06
-0.1%
1.4%
-1.2%
June 06
-0.5%
1.5%
-5.8%
July 06
-0.3%
1.0%
-3.5%
August 06
0.3%
1.3%
3.7%
September 06
0.5%
1.5%
6.2%
October 06
0.1%
1.4%
1.2%
November 06
0.3%
1.9%
3.7%
December 06
1.4%
2.8%
18.2%
January 07
0.7%
2.2%
8.7%
February 07
1.0%
2.7%
12.5%
March 07
-0.3%
3.3%
-3.8%
April 07
-0.1%
3.0%
-1.1%
May 07
0.3%
3.4%
3.5%
June 07
0.4%
4.4%
5.5%
July 07
0.9%
5.6%
10.7%
August 07
1.2%
6.5%
14.8%
September 07
0.3%
6.2%
3.1%
October 07
0.4%
6.5%
4.3%
November 07
0.7%
6.9%
8.3%
December 07
1.0%
6.5%
13.0%
January 08
1.3%
7.1%
16.3%
February 08
2.5%
8.7%
34.6%
Look at the last row.This gives a better idea than do the headline annual figures of how variable inflation has been and how it has accelerated.The first thing to note is that inflation really began to pick up at the end of 2006, but only began showing up in the annual numbers in the summer of 2007.A quick calculation (which is not included in the graph) indicates that from May 2007 to now China has suffered from double-digit inflation (11.1% annualized).The same calculation also suggests that if the next three months show price increases that on average equal the price increases of the past eight months (around 1% month-on-month) we will have double digit year-on-year inflation in China by May.
The second thing is that the February rate of increase in the CPI was very high (35% on an annualized basis), more than twice as high as the already-high January rate of increase.Because of the big jump in February prices, the numbers for March are likely to be distorted.In fact prices could decline significantly in March (by 1.8% on average) while still maintaining a continuation of January’s 7.1% year-on year CPI inflation.If prices do not decline this month, March 2007 year-on-year CPI inflation will reach 9.1% or more.
I have no idea yet what is likely to have happened to March prices.I understand that some food prices are down from their March highs but other prices have increased.Meanwhile it seems that in today’s newspapers, articles about fuel shortages in China are as plentiful as diesel is short.There have been so much noise and so many rumors about the need to raise fuel prices that hoarding is apparently becoming a problem once again, and the energy authorities have announced many times recently that there is plenty of oil and no need to hoard.Since this is what they said before the last fuel crisis, in September and October, I suspect that their attempts to soothe the market are not likely to be terribly effective, although in good bureaucratic fashion they are also calling for the police to punish “those who spread rumors or hoard oil.”Here is what today’s China Daily says:
China's major oil suppliers denied rumors about oil price rises, and blamed the rumors for the worsening fuel supply shortfall that is spreading northward across the country.High international oil prices have fuelled price rise prospects in domestic market. Some producers and dealers started to hoard oil amid the rumors, worsening the situation, China National Petroleum Corporation (CNPC) and China Petroleum and Chemical Corporation (Sinopec) jointly announced.
The shortage, first reported in southern China, now appears to be spreading to the northern parts of the country.Shanghai, the country's economic center, is now being affected, with rationing, long queues and power-off filling machines becoming common at filling stations.
The Shanghai Economic Commission said on its website that the city has enough diesel to last more than 10 days.CNPC and Sinopec emphasized that China had enough oil to ensure a stable supply and the fuel-supply crises of the second half of last year would not re-emerge.
I suspect that it will be politically difficult to let oil prices rise in March, especially because of its perceived impact on inflationary expectations, but if fuel shortages don’t abate quickly the authorities may have to raise fuel prices soon anyway.My guess is that overall March prices will be down, but if they are down by 1% or less (for year-on-year inflation of 8.0% or more) the very high inflation momentum of January will have continued through the first quarter.
How does this stack with GDP growth? It sounds like 11% would be a huge drain on last year's supposedly fast growth.
By orgulous - 3/24/2008 8:57 PM
I did the same thing you did. However, I wasn't able to get Jan, 08, Jan 07, Sep 06 month to month figure from NBSC. The tables disappeared, at least on the day I looked for them.
Anyway, I use these figures to see how well Wen's prediction is going to be. If the economy will behave just like he said: 4.5% over the rest of the year, the reported year to year for 2008 will be 6%. And to the less initiated, the year to year figure will remain 7 to 8% till at least August, even if Wen is right.
For the even more optimistic: If there is no inflation, zilch, for the rest of the year, the year to year figure will still be above 5% at least till July.
Have a wonderful year, and welcome to the wonderful world of indexing.
By Bill - 3/25/2008 12:14 AM
I estimate March m-m CPI round -1% and give 8.0% y-y CPI. but the moderation is meaningless when energy supply disruption or forced rationing begin to bite
It is very likely CPI to hit double digit, even if official CPI does not, but almost ever goods/services prices are rising at double digit clip
By isaac - 3/25/2008 9:41 AM
Isaac, you are estimating 1% CPI deflation in March? What do your numbers look like? What is your estimate for fodd and for non-food?
By Michael Pettis - 3/25/2008 2:23 PM
Bill, if you send me an email i can send you my Excel file in which I reconstructed CPI from January 2006.
By Michael Pettis - 3/25/2008 2:27 PM
food roughly -3.6% m-m from Feb peak, non-food tick up 0.3%. some seasonal food prices change kick in after Chinese New Year and Snow melted, but really nothing to cheer as non-food prices will continue to rise on wages, oil prices still 20% below market
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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October, 2007
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