October 26th, 2011
Econintersect: Simon Rabinovitch had an interesting article at the Financial Times last week. He says that some analysts have discovered a big discrepancy in the data rported for price changes and the amount of implied price changes. While the official inflation rate was reported as up 5.7% year-over-year for September CPI, the GDP deflator for the third quarter is 10.3% year-over-year. The discrepancy is even greater for quarter-over-quarter data, with CPI up 1.5% and the GDP deflator 2.5x larger at 3.8%. Follow up:
Follow up:This raises serious doubts about the veracity of the government’s CPI (and PPI) numbers. Price pressures may be much higher that the slowly declining official inflation rate indicates. This may explain, says Rabinovitch, why China has continued to be more aggressive in monetary policy actions that might otherwise be indicated.
There are some complicating factors at play. From the FT article:
Now, the GDP deflator is an odd number in China. It consistently comes in higher than the CPI figure, mainly because investment is the dominant component in Chinese growth and the prices of investment goods have been rising faster than those for consumer goods.
But the gap between the deflator and CPI is usually innocuous, just a couple of percentage points. The fact that it could have grown to 4 percentage points on an annual basis and nearly 10 percentage points on an annualised basis is an indication that price pressures have probably been even more serious than previously believed in China.
Signs of slower Chinese growth have to a certain extent been welcomed by investors hoping that they could pave the way for a broad relaxation of monetary policy and a launch of fresh fiscal stimulus. Inflation is also beginning to slow. But if the deflator is right and inflation is slowing from a much higher level than officially reported, the hoped-for policy shift may not materialise, disappointing markets.
Hat tip to Sanjeev Kulkarni.