Inflation in the producer price index was 2.4% in July, less than the 2.6% the market expected and less than June's 2.5%. This is obviously good news for the PBoC, who are getting nervous about inflation, but I don't think we should declare victory yet.
CPI numbers come out soon, and I believe market expectations are that it will rise from 4.4% in June to around 5%. The consensus seems to be that this is no big deal because most of the price rise comes from temporary food shocks, and these should eventually work themselves out of the system. Dong Tao at Credit Suisse, however, makes a plausible case that adverse food shocks should keep inflation high through 2008.
I am not sure I would be so blase about CPI rises due to "temporary" shocks. First, if they persist they have a real effect on savers' perceptions of the value of holding deposits. Second, I refer to an article in today's Financial Times titled "China inflation threat caps energy prices", which points out that the prices of certain products, such as power and energy. are capped by the government. Effectively this means that a kind of payment that should have been called "inflation" is being renamed "taxes". This may help keep CPI down, but expenditures are expenditures, and keeping the inflation proxy low is not the same as keeping the real cost of goods down.
News says NDRC has informed local authorities to scrap administrative levies on food suppliers but not to intervene market directly. Assuming the "food shocks" persist, do you see the gov't will eventually be drawn into the market thru a form of "taxation" on the suppliers? If the inflation fear spreads fast from food to other areas, do you think the gov't will have to step in and cap the prices just as what they've been doing on energy sector... esp. given that most food vendors are not SOEs, the gov't may have less reluctance to do so? "Tax" could end up being the right proxy to use in that case? =)
By Jefferson - 8/9/2007 6:56 PM
I think it would be very difficult to cap food prices since the industry consists of thousands (millions?) of small producers and retailers.
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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Comments (2) for "PPI inflation declines"
December, 2007
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