China's inflation statistics don't show the true picture

Last week's edition of The Economist magazine carried a fascinating article detailing the tricks Argentina's official statisticians use to disguise their country's true rate of inflation.

These include rounding down all numbers to the right of decimal points, using official government prices rather than the prices that consumers actually pay in the shops, and simply omitting goods with fast-rising prices from the consumer price index (CPI) shopping basket.

As a result, Argentina's statisticians are able to claim that inflation is running at a relatively modest rate of around 10 per cent, rather than at the sky-high 25 per cent that independent economists and most consumers believe is nearer to the real rate.

There are three reasons why the government of President Cristina Fernandez de Kirchner is so keen to obscure Argentina's true rate of inflation. First, of course, high inflation makes the administration look bad to the electorate. Second, by understating the real inflation rate, officials hope to dampen consumers' inflation expectations, so keeping a lid on future price rises.

Third, by declaring an artificially low rate of inflation, official statisticians are saving the administration vast sums that it would otherwise have to pay out to the holders of inflation-protected government bonds.

No one believes that Beijing is as bad as Buenos Aires. Even so, there is a lingering suspicion that something similar may be going on at the National Bureau of Statistics and that China's official data also understate the true extent of rising prices, although not to the same extent as in Argentina.

On the surface it looks as if China's inflation rate is abating from last year's high. Despite an uptick in January, which saw the official rate of consumer inflation rise to 4.5 per cent from 4.1 per cent in December, price rises remain well below the 6.5 per cent rate hit last July.