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China’s Consumer Price Inflation

May 15, 2011

One of the more arresting set of headlines this year has concerned inflation in China. An FT article published recently covers the usual angles: the effect on society, causes and finger pointing, pricing controls, interest rates and long term trends. The article concludes, not unreasonably, that inflation is a medium term (two year) issue, but the centrally managed approach to taming it will be less effective than the market’s, which will see pricing fall through overcapacity.

My purpose in blogging this is to provide a breakdown of CPI into the separate goods that make up the basket; something which is overlooked by the mainstream media. The eight components of the basket are influenced by different fundamentals and lag at different speeds. Fresh fruit and vegetable inflation, for example, probably hit six to eight weeks earlier, while residential pricing may lag by up to a year (I should say that these estimates are based on my observations as a consumer and not empirical data). Inflation in China is unsettling for a large number of businesses trapped between rising input costs and uneven demand. This is taking a psychological toll on individuals who are finding the high costs of essentials are making long term plans like home ownership impossible.

Total CPI in April is up 5.3%, ranging between 5% in towns & cities, and 6% in the countryside. The highest growing components of the basket are meat & poultry, fresh fruit, eggs and grain. Vegetables are cheaper than last year and everything else is growing at a fairly comfortable sub-GDP level.

China CPI April 2011
Source: NBS

In February, some adjustments were made to the weighting of China’s CPI basket by its publisher, the National Bureau of Statistics. Food price changes now have less of an influence over total inflation levels, while residential costs have been made a bigger determinant.

China CPI Basket Weights
Source: NBS / ANZ

Some have taken this as a sign that the NBS is masking higher food costs, while others argue that the adjustment more accurately reflects rising income levels in China. In the US and Japan, food is weighted at 17% and 26%, respectively.

Returning to the FT article, one might ask that if food is the biggest source of China’s inflation, would fixed asset overcapacity necessarily bring it down. Food is more expensive than this time in 2010 because of poor precipitation (just look at the 30% inflation in fresh fruit prices!), with logistical bottlenecks a secondary factor.

With a better rainfall this year and increased investment in rail freight, cold storage and agrichem, could CPI be tempered sooner? However, the psychological impact of higher food prices and the, now practically, unaffordable cost of buying property is driving wages up. This has the potential to be a much larger inflationary issue and will be dealt with in an upcoming post on China’s producer price index.   


About GCiS China Strategic Research

GCiS ( is a China-based market research and advisory firm focused on business to business markets. Since 1997, GCiS has been working with leading multinationals in sectors ranging from technology to industrial markets, medical, chemicals, resources, building and constructions and a few others.


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