Mainland inflation stems from pork supply shortfall

PUBLISHED : Thursday, 13 September, 2007, 12:00am
UPDATED : Thursday, 13 September, 2007, 12:00am

For an immediate perspective on words like 'surging' and 'soaring' to describe the latest mainland inflation rate of 6.5 per cent, cast your mind back to 1994. This same inflation measure went as high as 28 per cent that year. It had also done it five years earlier.

To put yet more perspective on all this, bear in mind that there are many baskets of goods by which to measure inflation rates and, in all of Asia, no one publishes more of them than Beijing does. I hesitate to say that this may constitute a classic example of quantity in inverse proportion to quality but I am sorely tempted.

Inflation numbers in the mainland can be had for consumer price indices and retail price indices, both broken down for sub-component, for rural or urban and for the different provinces. There are also highly detailed price indices for industrial goods, raw materials, corporate goods and fixed asset investment prices.

One in particular interests me at the moment, however. It is not actually an inflation index published by the National Bureau of Statistics but it can be calculated from the figures for gross domestic product.

This one is called the deflator. It measures the overall inflation rate of everything in an economy, not just consumer or producer prices, and it is derived from taking the difference between nominal and real GDP figures.

The red line on the first chart shows you the recent record of the deflator, up an average of more than 6 per cent year on year for the past three years.

What is so unusual then about having one component of the overall economy, consumer goods, show an average price increase of more than 6 per cent?

What is unusual is, of course, that only one component in the consumer basket - meat and poultry - has pushed consumer prices up so sharply, and specifically only pork prices, which were up 86.5 per cent over the same month last year.

All other components of the basket show much lower inflation rates.

This raises an immediate question of transparency. Is the outbreak of the blue ear disease among pigs in the mainland much greater than the authorities had earlier let on?

There has been very little disclosure so far of the full extent of this disease. The mainland's stock of live pigs is said by some accounts to have fallen by 10 per cent but this is probably not enough to explain the huge leap in pork prices.

In trawling yesterday through the agricultural figures published by mainland sources, I came across one indicator to suggest that the scale of the problem is larger. Exports of feedstuff for animals shot up in July to US$95 million in value, which, as the second chart shows, is more than double what they were running at in the five previous years. If there are fewer pigs to feed, then sell the feed elsewhere.

But this does not resolve the big question about the mainland's inflation rate. If it is only pork prices that are pushing up the overall price level, then an end will soon come to this spike in inflation. Pork prices cannot rise forever.

Inflation is in the end a monetary phenomenon, the result of an excess of money chasing a more limited supply of goods and services.

A sustained bout of high inflation is only possible in any economy if the stock of money in that economy has been cheapened by the issuance of too much of it.

And the evidence from other statistical sources in the mainland suggests that this has not yet happened. Money supply growth on the M2 measure of 18.5 per cent year on year, for instance, is not out of line for an economy growing at 11.5 per cent.

In other words, what we have in the sudden rise of consumer prices in the mainland at the moment is not really an inflation phenomenon but a pig supply anomaly.

It may still become an inflation phenomenon; the high economic growth rate certainly invites one, but it is not one yet.