Rising Pork Price Is Not Evidence of Inflation

Bloomberg: China's Rising CPI, Deepening PPI Deflation Challenges PBOC
The price divergence complicates the policy outlook for the People’s Bank of China. CPI inflation is now higher than the one-year benchmark deposit rate, crimping real interest rates for savers. Meantime, factory deflation is pushing up real borrowing costs for the industrial sector.

"This is a real problem," said Zhu Qibing, a Beijing-based analyst at China Minzu Securities Co. "For a manufacturer, CPI represents its costs because wages rise, and PPI represents the prices of its product. Now profits of enterprises are being further eroded."

The pickup in CPI was due to surges in pork, vegetable and egg prices, an NBS official said in a statement. Food prices rose 3.7 percent in August from a year earlier as pork increased 19.6 percent and vegetables 15.9 percent.
Inflation is a rise in the supply of money and credit in the economy. This eventually leads to a general rise in prices. A general rise in prices does not occur immediately and when it does begin, it happens unevenly. For example, commodity prices, specifically oil and copper, are often early risers. In the current case of China, there is a deep deflation on the producer side of the economy due to massive malinvestment. The bad debts backing this investment are a credit and deflationary collapse waiting to happen. The rise in pork prices is explained by the unique conditions of that industry, namely pork prices collapsed a year ago. If pork and vegetable prices are backed out of the CPI, it would show a disinflationary trend.

Reverse engineering China's dependably stable Consumer Price Index and Why Pork Prices Are Such a Big Deal in China explain why:
Pork is China’s favorite meat. In 2010, analysis by a researcher at the Chinese Academy of Social Science suggested that pork made up a third of the food part of the CPI basket, or 10% of the CPI as a whole – making it the largest single component.
I don't know if pork is still 10% of the basket (I highly doubt it), but if pork is 10% of the basket, then removing it from the August CPI would cause year-on-year inflation to fall from 2.0% to 0.1%, and month-on-month inflation would fall from 0.5% to negative 0.3%. Deflation. Overall, if food is 32% of the basket and it increased 3.7% yoy in August, removing it leaves CPI up about 1.2% yoy and no change from July.

If China is worried about rising port prices, it can top its strategic pork reserve. As for the PBoC, there is no dilemma.

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