Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
Silver Short-Term Trend Analysis - 26th June 19
Iran and the Dying Days Of the US Empire - 26th June 19
Why a Saturated Online Gaming Market Spells Good News for Gamblers - 26th June 19
Natural Gas Sets Up Bottom Pattern - 26th June 19
Has Gold Price Broken Out Or Not? Technicals And Fundamentals - 26th June 19
Stocks and XAU Gold Miners Next Bull and Bear Markets are Now Set Up - 26th June 19
Gold Price Trend Forcast to End September 2019 - Video - 25th June 19
Today’s Pets.com and NINJA Loan Economy - 25th June 19
Testing the Fed’s Narrative with the Fed’s Data: QT Edition - 25th June 19
What "Pro Traders" use to Find Profitable Trades - eBook - 25th June 19
GDX Gold Stocks ETF - 25th June 19
What Does Facebook’s LIBRA New Crytocurrency Really Offer? - 25th June 19
Why Bond Investors MUST Be Paying Attention to Puerto Rico - 25th June 19
The Next Great Depression in the Making - 25th June 19
The Bad News About Record-Low Unemployment - 24th June 19
Stock Market New High, but…! - 24th June 19
Formula for when the Great Stock Market Rally Ends - 24th June 19
How To Time Market Tops and Bottoms - 24th June 19
5 basic tips to help mitigate the vulnerability inherent in email communications - 24th June 19
Will Google AI Kill Us? Man vs Machine Intelligence - 24th June 19
Why are Central Banks Buying Gold and Dumping Dollars? - 23rd June 19
Financial Sector Paints A Clear Picture For Stock Market Trading Profits - 23rd June 19
What You Should Look While Choosing Online Casino - 23rd June 19
INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - 22nd June 19
Here’s Why You Should Drive a Piece of Crap Car - 22nd June 19
How Do Stock Prices React to Fed Interest Rate Cuts? - 22nd June 19
Gold Bull Market Breaking Out! - 21st June 19
Post-FOMC Commentary: Delusions of Grandeur - 21st June 19
Gold Scores Gains as Draghi and Powel Grow Concerned - 21st June 19
Potential Upside Targets for Gold Stocks - 21st June 19
Gold Price Trend Forcast to End September 2019 - 21st June 19
The Gold (and Silver) Volcano Is Ready to Erupt - 21st June 19
Fed Leaves Rates Unchanged – Gold & Stocks Rally/Dollar Falls - 21st June 19
Silver Medium-Term Trend Analysis - 20th June 19
Gold Mining Stocks Waiting on This Chart - 20th June 19
A Key Gold Bull Market Signal - 20th June 19
Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - 20th June 19
Investing in APPLE (AAPL) to Profit From AI Machine Learning Stocks - 20th June 19
Small Cap Stocks May Lead A Market Rally - 20th June 19 -
Interest Rates Square Minus Zero - 20th June 19
Advice for Financing a Luxury Vehicle - 20th June 19
Stock Market Final Blow Off Top Just Hit… Next Week Comes the FIREWORKS - 20th June 19
US Dollar Rallies Off Support But Is This A Top Or Bottom? - 19th June 19
Most Income Investors Are Picking Up Nickels in Front of a Steamroller - 19th June 19
Is the Stock Market’s Volatility About to Spike? - 19th June 19
Facebook's Libra Crypto currency vs Bitcoin: Five Key Differences - 19th June 19
Fed May Trigger Wild Swing In Stock Index and Precious Metals - 19th June 19
How Long Do Land Rover Discovery Sport Brake Pads Last? - 19th June 19
Gold Golden 'Moment of Truth' Is Upon Us: $1,400-Plus or Not? - 18th June 19
Exceptional Times for Gold Warrant Special Attention - 18th June 19
The Stock Market Has Gone Nowhere and Volume is Low. What’s Next - 18th June 19
Silver Long-Term Trend Analysis - 18th June 19
IBM - Watson Deep Learning - AI Stocks Investing - Video - 18th June 19
Investors are Confident, Bullish and Buying Stocks, but… - 18th June 19
Gold and Silver Reversals – Impossible Not to Notice - 18th June 19

Market Oracle FREE Newsletter

Gold Price Trend Forecast Summer 2019

China Inflation: Getting Worse and Coming To A Wal-Mart Near You

Economics / Inflation Feb 16, 2011 - 09:09 AM GMT

By: Dian_L_Chu

Economics

Best Financial Markets Analysis ArticleOn Tuesday Feb. 15, China reported its consumer prices (CPI) rose 4.9% year-over-year (yoy) in January, which came in less than expected. Economists were expecting 5.4% inflation, based on a Bloomberg survey.

However, after digesting the data, Asian markets closed mixed on that news, with China’s Shanghai Composite staying flat after a choppy trading session.


Well, the reason why markets reacted that way is because the lower figure is partly the beneficiary of a previously announced change--effective January 2011--in the weight of items included the CPI basket calculation.

Index Calculation Change

Food previously accounted for a third of the index calculation and was the main driver of inflation last year.  According to Blomberg, National Statistics Bureau (NSB) said that a reweighting of the CPI, including cutting the contribution from food, boosted the headline rate by 0.024%.

Bloomberg quoted Mizuho Securities Asia Ltd. Saying that the CPI calculation shift effect is more like 0.2%. That is, without the change, the CPI may have been 5.1%.


Manwhile, NSB said the Producer Price Index (PPI) spiked 6.6% yoy in January after escalating at 5.9% in December.  The component calculation of the PPI also has been revised, including an addition of about 2000 products to the basket and adjusting the weightings.

The change reduced January’s yearly PPI inflation by 0.05%, which means the index would have seen an increase of 6.65% without the basket change.

Spilled Over to Non-food

Chinese statistic bureau did not disclose a breakdown of the basket for either index. So, the alterations made it quite impossible to directly compare the January data on an apple-to-apple basis to earlier months. Nevertheless, there are still plenty of clues.

First of all, it is evident that there's now a broadening escalations spilled over to non-food items as well. Core inflation, stripped of food, rose 2.6% yoy, the highest in at least a decade after rising 2.1% yoy in December.

Residence costs jumped 6.8% from a year ago, the most since August 2008. Not to mention food prices soared 10.3% after rising 9.6% in December - Grain escalated 15.1%, fresh eggs climbed 20.2%, and fruit spiked 34.8% from a year ago, according to the official report.

Previous Tightening Not Enough

Regardless which way you calculate, January also marks the fourth straight month that the inflation has exceeded Beijing's 4% target. This clearly illustrates measures taken by the Chinese government, e.g., multiple interest rate hikes, raising bank reserves requirement, and letting Yuan appreciate, have not been enough to control surging prices.

Furthermore, I personally prefer PPI as an inflation predictor and indicator, as it shows the coming pricing pressure that could be passed down through the supply chain. And the current reading of 6.6% just further supports the view that China’s inflation is far from being under control.

Feed the Inflation


China’s inflation problem could be attributed mostly to the over abundant money supply, increasing domestic demand from a growing middle class, and bad weather hurting food supplies. On top of these existing culprits, China may also increase retail gasoline and diesel prices to reflect higher international crude prices, People’s Daily said Feb. 11. China last increased fuel prices by around 4% on December 22.

Moreover, the worst drought in 60 years hitting China northern “wheat belt” will only putting more upward pressure on the already rampant food price inflation, although Beijing so far has downplayed it.

Increasing Input Costs

China’s money supply surged 48% in two years (which is not that different from the U.S. Fed’s QE), the flood of liquidity has been used mostly to speculate on commodities/raw materials instead of stimulating consumption.

As traditional industries, such as steel and textile, are hurting from rising input costs, the most alarming sign is the widening gap between PPI and CPI. This suggests producers and manufacturers have not been able to pass through the cost increase.

Eat, Pass Through 

So, eventually these companies most likely will eat some of the cost increase, which means shrinking margins, while exporting some more to their clients in Europe and the U.S.  And the companies that import goods from China will face the same dilemma --absorb or pass through the price increase. 

Since China’s economy relies heavily on manufacturing and traditional industries, the implication of lower profitability could pose a serious problem for many companies, and China’s economic growth. 

No Way Out

The importing countries, meanwhile, will likely also suffer from lower corporate margins and high consumer inflation.  The United States, a net importer with China in the supply chain of many corporations, will feel that inflationary pain all the way from this side of the Pacific Ocean. 

Even if the U.S. switches to importing from other trading partners, it will not make much of a difference, as other emerging economies are also suffering from the similar inflation headache. For instance, India’s benchmark wholesale-price index rose 8.23% in January, Indonesia’s inflation is 7% and South Korea’s is 4.1%.

Coming to a Wal-Mart Near You

Many economists predict that China will likely be forced to take stronger measures that could slow economic growth. Reuters reported China may increase the bank deposit reserve ratio to 23% from the current 19.5%, and the People's Bank of China (PBOC) is also expected to permit the yuan to rise further, according to a report by the State Information Centre under the National Development and Reform Commission. 

Japan’s Mizuho Research Institute predicted in December that China may raise interest rates up to six times by the end of 2011 (one rate hikes in Feb. 2011 so far).

Regardless when or what China’s doing to rein in inflation, it no doubt will put a brake on one of the very few bright spots in the world. While China’s busy tightening and dealing with the once in 60-year mass drought, consumer price inflation, and diminishing margins will likely crop up pretty much everywhere from mass retailers like Wal-Mart, Target, to high tech products from companies such as Apple, Hewlett Packard, and Dell.

Disclosure: No Postions

Dian L. Chu, M.B.A., C.P.M. and Chartered Economist, is a market analyst and financial writer regularly contributing to Seeking Alpha, Zero Hedge, and other major investment websites. Ms. Chu has been syndicated to Reuters, USA Today, NPR, and BusinessWeek. She blogs at Economic Forecasts & Opinions.

© 2011 Copyright Dian L. Chu - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules