I am in France for a board of directors meeting so I have not been as timely with my blogs as I would like to be.The news that September CPI came in at 6.2% is by now old news.A lot of people, from the government to a number of research analysts have been trying to put a brave face on it, but I think the number is not something we can ignore, for at least three reasons:First, although it is less than last month’s 6.5%, it is also much higher than July’s 5.6% and, no matter what, 6.2% is worryingly high.The fact that is down from its August peak is better than the alternative, of course, but it is not much comfort: average CPI inflation for the third quarter is 6.1%.Four months ago if someone had predicted September’s CPI accurately he would have been accused of being a reckless alarmist.
Second, we don’t really know what the real CPI number is.There are a lot of rumors flying around that the true number, if it hadn’t been reduced by price controls, and maybe even inaccurate reporting, would be even higher.Some of my students who live in the provinces have sent me some pretty worrying emails about prices at home – especially, for some reason, in Sichuan.
Third, it does no good to blame inflation on temporary supply constraints in agricultural products.Inflation doesn’t work that way.A supply constraint causes the price of the affected good to rise, but by diverting expenditures it should cause the prices of other goods to fall enough to negate the overall inflationary impact.This is clearly not happening.Inflation may be low in the non-food sector, but the fact that it is rising in spite of serious supply constraints in the food sector indicates that there is real inflationary pressure in the system.
One other thing is that the CPI numbers are year-to-year which means that a spike that doesn't go down causes the numbers to remain high for some time. The fact that the spike doesn't go down is of course a reflect of the huge pool of liquidity in the system.
The "rumors" that I've been hearing are that inflation is less of a worry to most people than health care, and that people in rural areas are seeing incomes increase from price increases since they affect food but not the cost of agricultural inputs.
And an inflation fundamentalist would point out that the continued deterioration in healthcare is, strictly speaking, a kind of inflation that does not show up in the CPI numbers. Declining quality is conceptually the same thing as rising prices, except that it often is not included in the CPI calculation because it is so hard to quantify.
I am less convinced about the impact of food inflation on farmers' income. If a significant portion of food price increases is caused by food shortages (pig disease, flooding, etc.) then I would imagine that total food related revenues must have declined, not risen. It seems counterintuitive to me that you can raise farmer incomes by destroying their crops and livestock, unless there had previouly been an oversupply problem.
By Michael Pettis - 10/21/2007 3:09 AM
The question is what happens after the food shortages stop. If there is a lot of liquidity in the system then food prices will stay at high levels even after the supply increases.
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 (3) for "September inflation remains ...
- 10/20/2007 11:11 PM
October, 2007