Today has seen some odd analysis from the BBC on China as it tries to imply that low inflation is bad. I somehow doubt that Chinese consumers and workers would agree with such analysis!Especially if they consider that the long-term deflation panic implied is based on what may be a much shorter-term decline in the price of crude oil and other commodities. I guess that BBC journalists will be pleased it is about to cost them a little more to fill up their cars with petrol or diesel due to the recent rally in the oil price to US $58 per barrel for Brent Crude! Can they please fill up mine too?
What numbers were released?
Actually we saw what would before these times have been described as something of an economic nirvana.
In January, the consumer price index (CPI) went up by 0.8 percent year-on-year. The prices grew by 0.8 percent in cities and 0.6 percent in rural areas.
So very gentle inflation close to zero,what is not to like about that? Also I note that relative price changes are in existence too.
Of which, the prices of eggs went up by 8.3 percent………(price of pork was down by 5.3 percent, affecting nearly 0.17 percentage points decrease in the overall price level);
I raise such a point because it is so regularly claimed these days that this cannot happen in a low/no inflation environment. Well it has just happened in China if not in the textbooks read by such individuals which must be quite thin by now with all the chapters they have had to tear out of them!
Indeed there is a deeper theme here as remember the argument that rising Chinese consumption of pork will push pork prices higher as China gets wealthier? Well the price of pork has fallen below the levels of 2010 as we wonder if another bubble has burst. The price now of lean hog futures (h/t @auaurelija ) is 61.27 compared to a peak of over 130. Please do not misunderstand me as I have written on here myself wondering what the long-term impact of likely rising Chinese consumption of pork will be? What I mean is that such thoughts right now need to adjust to a reality that is quite different not plough on regardless.
The Chinese numbers demonstrated a distinction which I am seeing time and time again as I look at inflation data.
The prices of consumer goods went up by 0.5 percent and the prices of services grew by 1.3 percent.
Goods inflation has fallen into the low/zero/negative zone whereas services inflation is chugging along still.
If we look for the impact of the lower oil price there is a category for “fuels and parts for vehicles” which has fallen by 18.3% in the last year so we see a clear influence there. Like the UK domestic fuel prices (-2%) have not followed the oil price lower by much.
What is coming next?
The producer price sector offers us a clear guide to what is building in the inflation chain and it is giving a clear signal.
In January 2015, Producer Price Index (PPI) for manufactured goods decreased 4.3 percent year-on-year, and decreased 1.1 percent month-on-month. The purchasing price index for manufactured goods went down by 5.2 percent year-on-year, and decreased 1.3 percent month-on-month.
These are substantial falls and the main drivers here are clear to see.
The year-on-year purchaser price indices for fuel and power decreased 9.9 percent, ferrous metal materials decreased 9.6 percent, chemical raw materials went down by 5.5 percent, non-ferrous metal materials and wires fell by 4.8 percent.
I have written before about the falling Iron Ore price which has dropped this week to the lowest levels since May 2009. The front month future (62% content) is at US $61.76 as I type this as opposed to the US $190+ of February 2011.
The South China Territories shiver
I have written before about Australia and perhaps Western Australia in particular being named as the South China Territories in the comments section on this blog. Well you might like to sit down before you see a consequence of this from the Australian newspaper.
In one of the starkest signs yet that the resources boom is over, a house in the Pilbara mining town of Port Hedland was passed in at auction for $360,000 at the weekend after it was bought for $1.3 million just four years ago.
Whilst this is an extreme example it is not out of kilter with developments.
The median house price in Port Hedland has fallen about 23 per cent in the past two years, according to the Real Estate Institute of WA.
But the national picture is different.
The weighted average of house prices across Australia’s capital cities rose by 1.9 per cent in the fourth quarter from the preceding three months, the Australian Bureau of Statistics said today.
Chinese house prices are falling
The numbers and methodology are a bit obtuse here but the message is like one in a bottle.
Comparing with the same month of last year, the sales prices of second-hand residential buildings decreased in 67 cities, and that of 3 cities increased. In December, for the price changes year-on-year, the highest increase was 1.8 percent, the lowest was down by 12.5 percent.
This is not the message that has been beamed out to the world as looking back I saw this from Reuters in December quoting a property developer.
The property market should not get worse in future,
Such numbers are notoriously unreliable but this from Xinhua News is worrying.
Exports dropped 3.2 percent to 1.23 trillion yuan and imports slumped 19.7 percent to 860 billion yuan, making the trade surplus expand 87.5 percent to 366.9 billion yuan, according to the General Administration of Customs (GAC) data.
Who do they blame?
The GAC data showed that China’s exports to the EU and Japan dropped 4.4 percent and 20.4 percent, respectively.
So we see that China has exported less for which it blames lack of foreign demand. But on the other side of the coin it has imported 19% less a lot of which will be caused by falling oil and commodity prices.
However you spin this situation it poses a question when you add in this.
The index, a key measure of factory activity in China, posted at 49.8 in January, fell below 50 for the first time since October 2012, while the new order index was 48.4, also lower from December’s 49.1.
The trade figures provide several themes here as there is a clear hint of a cooling Chinese economy. However if we look at a larger trade surplus I am reminded of the arguments that one way of looking at the problems pre credit crunch was to look at the surplus nations. How is that going? Well China is powering ahead in trade surplus terms apparently and Germany?
The foreign trade balance showed a surplus of 217.0 billion euros in 2014, which was the highest value ever recorded.
I am awaiting signs of progress of what former Bank of England Governor Mervyn King would call “rebalancing”.
If we return to the inflation theme there is much to consider. In officialese, if I may put it like that we have a fast rate of economic growth accompanied by low consumer inflation which as I pointed out earlier was once a form of economic Holy Grail. But unofficially as we wonder if falling demand was the cause of the oil and commodity price falls and now we see signs of asset price disinflation too we wonder what is actually happening here? The word deflation is regularly bandied about but a list of the building blocks for China is starting to acquire some ticks on it.Of course as time goes by the lower prices will in themselves help to provide an economic boost which is the bit usually missing from any disinflation/deflation discussion. So was the good news story described by China Crisis back in 1983?
It’s just wishful thinking