inflatie in china
What does the indicator tell us?
In an economy, inflation is the year-over-year increase in the price of a basket of goods and services.
This basket is referred to as the Consumer Price Index basket (CPI basket). The basket is determined based on the spending habits of the residents in the economy. There is a clear divergence between the spending patterns of developed and developing nations. While developed nations spend their income in an evenly distributed way, buying food, housing, utilities and extracurricular activities, people in the developing nations spend most of their income on basic needs such as food and shelter. As such, in the developing world food prices have a larger weight in the CPI Basket. China is a good example where food prices make up 40% of the CPI basket in urban areas and slightly higher in rural areas. These numbers are much higher than the U.S. where food prices make up only 12% of the CPI basket.
High weight in the CPI basket means that as the prices of food items go up, so does inflation. This is the case in China currently. Shortage in agricultural commodities (such as corn and rice) are pushing food
prices higher and as a result, are dragging headline inflation up. Although China has little control on global food prices, its government still needs to act, as inflation eats away from people’s wealth through
higher prices.
What are the economic and financial implications?
Chinese officials have been implementing various measures to control food inflation, such as:
(1)
subsidizing areas from the agricultural sector and
(2) setting temporary price controls on some food
items.
This is to ensure continuous supply of agricultural necessities such as grains, oils and sugar, which
could prove effective in the short-run. Nonetheless, January figures came out lower than expected this
month. Some analysts blame it on recent adjustments of the CPI basket: more weight was allocated to
the housing sector while food costs are now weighing less. However, when calculating it with the old
weights (higher food weight, lower housing weight), January CPI is even lower. This points out that
inflation is spreading away from food, toward other items of CPI basket (non-food items rose from 2.1%
last month to 2.6% in January, and the housing item rose 6.8% – the highest increase in more than two
years). This means a spillover of inflation is currently ongoing in China.
This is worrisome, as inflation can get sticky and can become harder to get rid of. In recent months, the
PBC has responded by raising the country’s policy rates (Required Reserve Ratio & Base Lending Rate)
and by ordering banks to issue less credit. By doing so, borrowing costs are set to increase, and spending
is likely to become more constricted; over time, such policy changes should bring down inflation through
lower prices in non-food items. However, despite significant efforts by Chinese officials to lower
headline inflation, we continue to believe that inflation will remain high in China for the majority of
2011.