Explainer | China inflation: how is it measured and why is it important?

Inflation captures the rising costs of goods and services in an economy and, as a result, the decreasing purchasing power of consumers
China’s inflation is most often measured by the consumer price index (CPI), which tracks the prices people pay for a series of goods and services

China inflation

Andrew Mullen

Published: 5:00pm, 10 Nov, 2020

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What is consumer inflation?

Consumer inflation is the rising costs of goods and services in an economy and, as a result, reflects the decreasing purchasing power of consumers, all other things being equal. Rising income can offset the impact of rising inflation. “Real” income growth is adjusted to subtract the impact of inflation.

How is China’s consumer inflation measured?

It is most often measured by the consumer price index (CPI), which tracks the prices people pay for a “basket” of goods and services. The list of goods is weighted, with those more often bought for daily consumption getting a higher weighting.

China's consumer price index (CPI) 2010-2020

Year	Headline CPI
2020	2.50%
2019	2.90%
2018	2.11%
2017	1.56%
2016	2.00%
2015	1.44%
2014	1.99%
2013	2.62%
2012	2.65%
2011	5.40%
2010	3.30%

Source: National Bureau of Statistics

As the prices of everyday goods rise, Chinese consumers feel the effects of inflation directly, as an increase in their general cost of living. China has never disclosed the weighting of its CPI basket, but estimates suggest food, tobacco and alcohol account for around 30 per cent, while pork – a daily staple of the Chinese diet – is believed to be the most heavily weighted product.

CPI is a key way to measure changes in purchasing trends and to track inflation.

What is China’s consumer inflation rate?

China’s official CPI rose by 1 per cent in July 2021 from a year earlier, compared with a 1.1 per cent rise in June

Having set a CPI target of about 3.5 per cent for 2020, compared with 3 per cent in 2019, China’s inflation rose 2.5 per cent in 2020.

What is the outlook for China’s consumer inflation rate?

China has set a CPI growth target of around 3 per cent per cent, compared to around 3.5 per cent last year.

"The projected targets for growth, employment, and CPI should keep the economy performing within the appropriate range. These targets are also well-aligned with the annual goals of subsequent years in the 14th Five-Year Plan period, and they will help sustain healthy economic growth," said Premier Li Keqiang as he delivered the government work report at the National People’s Congress in Beijing at the start of March 2021.

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What are CPI and PPI?

What is the problem with China’s official consumer inflation data?

The common complaint about China’s official CPI is that it significantly underestimates overall price pressures in China’s economy, though the National Bureau of Statistics has defended the indicator as a reliable metric to gauge the country’s price changes.

In particular, critics say CPI gives too little weight to the price of housing, which has soared across the country in the last decade.

What is the difference between CPI and PPI?

While CPI measures price changes from the consumer’s perspective, China’s producer price index (PPI) measures price movements from the seller’s perspective.

China’s PPI measures the changes in the prices that manufacturers charge wholesalers, or so-called factory gate prices. It is an early indicator of changes in consumer prices, as it offers foresight into how much goods will cost before they hit store shelves.

What is China’s producer price inflation (PPI) rate?

While China’s CPI measures changes from the consumer’s perspective, PPI takes the seller’s viewpoint.

Due to the trade war with the United States, China’s PPI dropped into negative territory in the second half of 2019, meaning manufacturers were increasingly having to discount their products due to the slowdown in the economy. This trend continued into 2020 due to the outbreak of the coronavirus, falling to a low of minus 3.7 per cent in May 2020.

China’s PPI rose by 9 per cent in July 2021 from a year earlier, compared with 8.8 per cent in June.

What was said about China’s April's inflation data?

“Producer price inflation was the strongest since October 2017 last month, as upstream price pressures remained significant due to supply constraints. This is feeding through to a rebound in consumer price inflation, though with the latter still relatively subdued and upstream price pressures likely to be mostly transient, we still doubt that inflation is about to become a key driver of [People’s Bank of China] policy,” Julian Evans-Pritchard, senior China economist at Capital Economics, said in a statement.

“Looking ahead, supply-side disruptions may persist for a while longer, keeping producer price inflation elevated in the near-term. Alongside a tightening labour market, this looks set to drive a further rebound in consumer price inflation – most likely to around 2 per cent by the end of quarter three.

“That said, we still expect much of the recent surge in upstream price pressure to prove transit, with industrial metal prices likely to drop back later this year as a tighter policy stance weighs on construction activity. As such, we don’t think inflation will rise to the point where it triggers a major policy shift by the [People’s Bank of China].”

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