My Blog

February 3, 2008

I’ve just seen one piece of good news and one favorable prediction about January inflation.  The good news is that the State Administration of Grain said in a statement posted on Xinhua News Agency's Web Site today that in spite of the recent disastrous weather, China still expects to meet its grain harvest target this year.  I did not realize that China is the world’s biggest wheat grower, but last year it harvested 501.5 million metric tons and this year it is on target to harvest around 500 million metric tons.

I hope this is true.  The favorable prediction comes from Chen Xiwen, director of the Office of the Central Leading Group on Rural Work, according to today’s China Daily.  “Given that prices of grain, pork and edible oil have seen no apparent rises, January CPI will remain stable,” Chen told the briefing held by the State Council Information Office.  He predicted that January CPI inflation would be 6.5%.

This is not stable, by any means, but a lot of other analysts, including me, are predicting that CPI’s rise will be closer to 7%.  Is 6.5% achievable?  Perhaps, but not without some fudging.  The government has been aggressively selling and/or delivering food reserves.  Given the weather-related chaos in the food markets, this is not at all an unreasonable policy, but it does tend to put temporary downward pressure on prices, and that pressure will be reversed when the government replenishes its stocks.  According to other reports farmers are complaining that food price freezes – another way of containing headline CPI inflation – are hurting them because they are being squeezed by higher fertilizer and energy prices.  Finally according to the China Daily article, “To help keep prices down, the government has ordered all highway and expressway operators to exempt trucks carrying vegetables from toll fees.”  Both price freezes and toll-road-fee exemptions reduce nominal food-related inflation, but they do so simply by a sort of accounting trick – what should have been called “higher food prices” will now be called something like “extraordinary loss” on the farmers’ and toll road companies’ income statements (I don’t mean that literally – the inflationary cost will simply show up as lower revenues or higher taxes).

I would have thought that it would have been smarter to let the full rise in food costs pass through into CPI numbers in January, because then inflation could be blamed on extraordinary circumstances.  They can continue to subsidize the food costs to the worst-affected consumers, since this is politically and humanitarianly necessary, but the subsidies should be segregated and made explicit, although perhaps this would be administratively too complicated.  Still, as it is, the net effect is to reduce upward pressure on prices in January and postpone that pressure into the next few months.  This is surely more likely to cause inflationary expectations to rise than are price increases concentrated in January.

Comments (6) for "Inflation predictions"

Perhaps you are trying to be fair, but this is a very thin stick on which to carry a heavy load. I don't see much reason for optimism on inflation yet. By Jaime Florida - 2/2/2008 5:42 PM

I was wondering where you get the 500 million metric tons of wheat production from. According to USDA, China produces around a fifth of that... Thanks, Mike By Mike - 2/4/2008 5:05 PM

what do you make of a report that I saw today that states: China is telling “Major coal-fired power stations, steel mills, and other heavy polluters” that they will issue a “broad shutdown order” effective 30 days before the start of the Olympics (July 7) and lasting through the games (ending August 24) Estimated Losses: • 13 GW of shut-down electric generation • 6 million mt of steel production capacity • 50 million mt cement plant capacity • 14 million mt iron ore capacity • 1 million mt paper mill capacity By Jean-Paul St.Germain - 2/5/2008 9:16 AM

Mike, that is the figure given to Xinhua by the State Administration of Grain. I am no grain expert so I have no sense of whether that number is correct or whether there are different definitions of grain and wheat. For me the only interesting point is that there will be no net reduction in the harvest? and so that should not affect supply. Still, with the price of fertilizer qnd energy rising for farmers. there will still be upward price pressure. By Michael Pettis - 2/6/2008 7:33 PM

J-PSG, I don't think it will have a major effect on the overall economy but as a Beijing resident I welcome anything that cleans the air, no matter how short-lived. By Michael Pettis - 2/6/2008 7:34 PM

Thanks, Mike. I checked the State Administration of Grain's website, which says total grain production 484 mn tons, and wheat 97.5 mn tons. Anyway, doesn't matter too much. I believe to have heard that China has pretty decent stock levels of grain, which means even if the harvest was severely hurt, they would do alright. It's a bigger issue with rapeseed oil, and thereby vegetable oils in general, where prices already are ridiculous... By Michael Haase - 2/7/2008 7:58 AM