Finally the numbers are in.The CPI was up 6.5% in October.This matches CPI inflation for August and, with that exception, is the highest monthly CPI inflation number since the 7.0% recorded in December 1996. On the one hand October inflation slightly exceeded the consensus forecast of 6.3-6.4%, but on the other hand it is below the 6.8-7.0% that some people (including me) were worrying about.
But is it really below 7%?The non-food component rose just 1.1% last month from a year earlier, the same pace as it did in September, whereas food prices were up 17.6%. I asked Oliver Shang, my assistant, to check whether the weighing of the components in the CPI basket have changed recently. According to him, at the beginning of the year small changes may be made in the composition of the basket, but major changes are only made every five years or so. That worries me, because it suggests that the composition of the basket hasn’t adjusted during 2007 to take into account price changes, and this might underreport the inflation actually felt by the average Chinese family.
For all of this year the food component of the CPI basket has been set at just over 33% of the total.But food prices have risen by about 15-20% since the beginning of the year.Wouldn’t that mean that the average Chinese family spends more on food than it used to, even if we assume that higher food prices may have shifted consumption somewhat?I recompiled the CPI numbers assuming that food’s share rose from 33% to just 36% (I assumed that there has been a lot of substitution and reduced food consumption), and I found that this would have driven CPI prices up by 7% year on year in October.Is this right, or is my methodology mistaken?
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.
Subscribe to this Site
Comments for "CPI inflation for October is...
December, 2007
.