Low inflation against grain of rising prices
HAS IT EVER occurred to you to ask why all the fuss in Beijing is about restraining inflation when the consumer price index still shows only a 3 per cent year-on-year rate of increase?
If it has occurred to you, then here are some further questions. First: What sort of inflation is likely to be seen in Beijing as posing the biggest danger?
No, it is not the sort that troubles the International Monetary Fund or the sort that sends up prices of television sets. Your answer is the sort of inflation that could lead to riots on the streets.
Second question: What sort of inflation could this be?
I offer no prizes for the correct answer here. One form of inflation has consistently done this across the world and throughout history. We are of course talking of food price inflation.
But obviously this does not apply to all foodstuffs. Who has ever heard of a caviar riot?
Here is the third question: For what foodstuff in particular do price increases have this effect?
You are there at last. It is the price of a loaf of bread or a bowl of rice that can send people into the streets in the hundreds of thousands. Grain, in all its forms, is the key.
Look at the first chart. The mainland's consumer price index in March (the latest available) shows a 30 per cent annual increase for grain, including rice. I cannot offer you the full explanation of this. Hong Kong is not a town in which you find agricultural experts and the only friend I have in the field is involved in sugar.
All I can tell you is that overall food prices are the fastest rising component of the mainland's CPI and grain prices have traditionally led the overall CPI up in past bouts of inflation. I can also tell you rough rice futures are rising like a rocket in the United States and the mainland's grain production has fallen 16 per cent over the past five years with a decline in crop area.
Does explanation even matter, however? It means very little to people if it does not bring food prices down again. Yes, the authorities in Beijing have reason to worry.
There are more measures of inflation than consumer prices and the second chart shows you a few key ones. The purchasing price index of raw materials is rising 7.9 per cent year on year, pushed up by ferrous metal costs, now 23.5 per cent higher than a year ago.
You would expect state-owned factories to take this as a signal that it is time to raise finished goods prices if they wish to generate a profit but, of course, they are more concerned with meeting production targets than with profit and, if under threat of loss, they simply tap state-owned banks for more money, all at low rates of interest. Capital and its costs are still subject to the direction of planning authorities rather than the market.
Thus the overall rate of increase in the CPI stays down despite swiftly rising food prices for consumers and rising input prices for industry. Inattention to the changing dynamics stops inflation in durable goods and consumer services from rising.
But what this does is create a double threat for the future. On one hand there is the rising danger of social disorder from a broken rice bowl and on the other the spectre of widespread and growing losses in industry as whatever profits may exist are swallowed by rocketing costs.
And if this industrial dilemma is hidden by yet further injections of capital from state-owned banks, it only means that the already precarious financial position of these banks will be further eroded at a time when Beijing has pledged to put them on a commercial footing.
The big problem is not that the published overall rate of consumer inflation is rising dangerously but rather that it is not doing so. I suspect the authorities know it, know why and know what it could portend.
