Beijing has a plan for dealing with runaway food inflation: manipulate the data
China is cooking the books on inflation.
This is hardly surprising. The Chinese leadership knows too-high inflation has the potential to cause serious social unrest. So it’s doing all it can to convince people that it has inflation under control.
How bad is inflation in China? It’s hard to tell.
But one stunning figure stands out. According to the National Bureau of Statistics, the official state agency in charge of measuring inflation, the average price of food in 50 cities in a 10-day period in January rose 4.6 %.
That’s an annual rise of 416%!
But fear not. Beijing has a plan for dealing with this kind of runaway food inflation: manipulate the data.
The Chinese track consumer prices like everyone else – via a Consumer Price Index. This is made up of a basket of goods and services that’s supposed to reflect the average Joe’s consumption.
It’s up to government officials what exactly to include in that basket.
One thing the National Bureau of Statistics has done is cut the weighting given to food (by 2.2 percentage points). It has also increased the weighting given to housing (by 4.22 percentage points).
Cigarettes and alcohol also now feature less prominently. And according to analysts at Goldman Sachs, China’s statisticians may have also adjusted some of the weights of some of the subcategories in the overall food category. I expect pricy meat and grains are likely to feature less going forward.
No surprise then that the latest inflation print out of China – a 4.9% rise in consumer prices in the year to January – came in lower than expected.
Back in the U.S., we’re told inflation isn’t a threat. As of January, the official 12-month rise in the Consumer Price Index was just 1.5%. Strip out food and energy and the rise was a tiny 0.8%.
So why does it feel like prices are rising in the U.S. if the official numbers say there’s nothing going on?
Because U.S. government statisticians have their own way of doctoring the data.
According to statistics expert John Williams of myth-busting website Shadow Government Statistics, if the U.S. government still calculated inflation the way it did when Jimmy Carter was president, the official rate of consumer price inflation would be closer to 10%.
One way the government skews the CPI toward deflation is something called “hedonics.”
A good example of how this works is a new laptop. If you pay $800 today for a new laptop and $800 four years ago for a new laptop, the government calls that a price cut.
Why?
Because thanks to advances in screen resolution and processing power, etc, the laptop you bought today for $800 is a better machine than the one you bought four years ago for the same price.
Of course, for you $800 is $800. You still had to go out and earn that money. And that part hasn’t gotten any easier.
As I said on Monday, another thing helping give the impression of low inflation in the U.S. is the relatively small portion of the U.S. CPI made up of food prices.
In the U.S. food prices make up just 7.8% of the CPI. In India they make up 47.1%. And taken together, food and energy are a much smaller portion of the CPI in the U.S. than in emerging economies.
What It All Means For You…
Investors are having second thoughts about the emerging markets right now. And money is flowing out of emerging market stocks and back into U.S. markets.
But they’re overlooking two important things:
1) Inflationary pressures hitting the emerging markets now are cause for concern in the U.S. too. It’s just that the U.S. government skews the figures toward deflation to make everything.
2) Authorities in the emerging markets admit that inflation is a problem. And many emerging market central banks are raising rates to combat rising prices. In the U.S. the Fed is refusing to admit that inflation is even a problem. This signals problems in the future for U.S. consumers.
The herd is overreacting to the inflation story in the emerging economies. Think twice before following them back into U.S. stocks.
