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.
But many people believe the true rate of inflation is much higher than the official figures say.
The main reason for this impression is probably that the prices of things people buy every day are climbing far more quickly than the overall inflation rate.
The most obvious example is food, the largest single item in the monthly shopping baskets of most Chinese households. Over the past 12 months, the price of fresh vegetables has risen 23 per cent, while pork prices have shot up an eye-watering 25 per cent (see the chart above).
Consumers notice those increases every time they go to the market, whereas they probably don't notice that car prices have fallen by 6 per cent over last year. As a result, many are convinced that inflation is much higher than the official data imply.
And they may have a point. According to Professor Yiping Huang and his colleagues at Barclays Capital, China's CPI does a poor job of reflecting actual increases in the cost of living.
That's partly because the CPI basket fails adequately to capture the increase in housing costs over recent years as property prices have soared, and partly because it is insufficiently weighted towards services, which have been rising faster in price than goods.
On top of that, the destabilising effect of past inflation episodes means that local officials are reluctant to relay the true extent of price rises when reporting to Beijing, argues Huang. As a result, Huang estimates that the official CPI data may have understated last year's peak inflation rate by between 1 and 2 percentage points.
That's hardly a discrepancy of Argentine proportions. Even so, it's troubling. All the signs indicate that China is heading for a period of structurally higher inflation. A dwindling labour supply is pushing up wages at double-digit rates, burgeoning demand is driving commodity prices higher, and the deregulation of fuel prices and the potential imposition of environmental taxes promise to add to production costs.
In such an environment, unreliable official data will only add to consumers' inflation expectations and erode policymaking credibility, exacerbating the problem. China's statistics may not be as bad as Argentina's, but right now that is small comfort.