Chinese Inflation is Growing

Posted by - Monday, December 10th, 2012

Chinese inflation rose last month, led by a jump in food prices.

The Consumer Price Index increased to 2 percent in November, according to a report from the National Bureau of Statistics on Sunday. It's up for the first time since August after only hitting 1.7 percent in October.

The increase in inflation was lead by a jump in food prices – particularly fresh vegetables. Vegetable prices were up 11.3 percent, while total food prices gained 3 percent in November.

Production materials, however, experienced a drop in prices, which fell 2.2 percent from a year ago.

The new inflation data doesn't really have economists worried. A year ago, China's annual inflation rate was at four percent – a maximum target level for the nation.

GDP growth is also expected to gain in the fourth quarter of 2012. In the third quarter, growth fell to 7.4 percent, but analysts believe it will jump back up to 8 percent this quarter.

From CNN Money:

“Overall, we believe economic momentum has turned a corner since September, with recent data pointing to a continuing recovery,” Baclays' economist Steven Lingxiu Yang said in a research note.

Qu Hongbin of HSBC has even suggested that GDP growth could reach 8.6 percent for 2013, as he told China Daily.

China's industrial output was up in November, reaching 10.1 percent compared to 9.6 percent last month.

Retail sales were up 14.9 percent from last year, and investments in fixed assets were up 20.7 percent.

From China Daily:

“With a benign inflationary outlook, we expect the central bank to keep interest rates unchanged in 2013 as growth bottoms out,” he [Qu] said.

But CPI is seasonally adjusted – meaning it doesn't really demonstrate what consumers pay. Unadjusted inflation is often much higher.

A report from the American Institute for Economic Research demonstrated this last month when it created an Everyday Price Index (EPI) to measure what consumers actually pay.

And the report found inflation was much higher in reality than the seasonally adjusted numbers let on.

The same is likely true for China. The economists that remain unconcerned about this growing inflation aren't taking the adjustment into account. In reality, it's likely China's prices grew much more than 2 percent.

If vegetable prices jumped 11.3 percent last month on an adjusted basis, imagine how much the prices must have really grown. 20 percent? 30 percent?

China's GDP growth rate has been above 10 percent for years, but that sort of rapid growth might now be in the past for the Asian nation. Steven Lingxiu Yang called the turn a “new normal of slower growth” for China.

And if this “new normal” continues to show growing inflation rates, it might not be long before the average consumer cuts out vegetables and is struggling to pay for that small slice of pork.

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