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Wet market the best place to gauge China’s CPI

Predicting the trend of China’s consumer price index (CPI), according to my experience, is not a very difficult task. At least, it is easier than fumbling for some clues on the country’s often buck-the-trend stock market. (In fact, I quite like the idea of calling the market a casino.)

To start with the CPI guessing game, we need to know the major components that should be analyzed.

There are eight major categories in the CPI basket. They are food, clothes, tobacco and liquor, health and personal care goods, home appliances and maintenance, housing costs (mostly rentals), transport and communication, and expenses on entertainment, education and culture.

It seems that we have a lot of things to analyze. But in fact, some of them can be simply ignored most of the times.

You can forget about the last two categories – transport and communication, and expenses on entertainment, education and culture – as they usually do not change much. Take the latest figures for example. In March, transport and communication costs jumped 0.3 percent, while expenses on entertainment, education and culture rose just 0.1 percent. These two types of prices hardly change much because transport, communication and education are deemed public services and are mostly provided by the government and state-owned companies, which do not often adjust prices.

Housing costs, at one time, were a major driver of the CPI. But with policy tightening on the property market in place, their increase has been substantially slowing down, and hence play a less significant role in the CPI.

Costs on buying and maintaining home appliances are strongly linked to the trend of housing costs. For the same reason that was mentioned previously, this category does not greatly affect the CPI now.

The four other categories show much wider price fluctuations, as they are daily consumer goods and are subject to fast-changing interplay between demand and supply. So they are the very things that we should keep an eye on in our effort to predict the CPI trend.

But the four categories do not have equal weightings in the CPI basket.

Cigarettes and liquor, for example, account for only 4 percent of the CPI. Therefore, this category can be set aside. Clothes account for about 9 percent, while health and personal care goods have about 10 percent share. But their influence in the CPI is dwarfed by food, which accounts for one third of the CPI.

That is fair to say. If we follow the trend of food prices, we can feel the pulse of the CPI movement. Although the prediction about CPI may not be accurate, it will not derive much from the actual trend.

Applying this rule, my conclusion is that China’s inflation pressure will ease in the months to come. That will give the government greater leeway for policy adjustment.

My way of gauging the food price change is to visit the wet market, gather and compare the prices of several popular food items.

Prices of pork are on a downward trend in the past few months. This is because pork prices have been on a high level in the past two years, prompting many individual raisers to keep more pigs. And these pigs hit the market since the Spring Festival, greatly boosting supply and which will continue to cause a retail price drop.

Prices of vegetables also declined. Take cole for example. During the Spring Festival, a kilogram of cole, a widely-consumed vegetable in China, cost 12 yuan. It now costs 3 yuan per kilogram in Beijing. If you are a smart shopper, you can easily get a bargain of 2 yuan a kilogram.

The reason for the price decline is pretty much the same as in the case of pork. Warm weather has lifted northern China from the months-long chill and locally-grown vegetables have begun flooding the market, thereby pulling down prices. Apart from that, the government’s effort to subsidize farmers in their seed and fertilizer purchases has helped slash farming costs, benefiting end consumers as well.

The downtrend of pork and vegetable prices will persist for sometime, pulling down the CPI.

But the prices of some food items are going up and this is likely to offset the drop in the prices of pork and vegetables. Cooking oil saw the biggest prices increase as major edible oil producers raised their prices in March, citing costs of labor and raw materials.

In my opinion, however, these price hikes are moves taken by the producers to make up for their losses during the last circle of high inflation, when they were asked by the government to refrain from raising their prices. With prices of raw materials, such as rapeseed and peanut, actually dropping in the past few weeks, more price hikes cooking oil producers appear unlikely.

Generally speaking, China will bask in a happy period of small inflation pressure in the coming months.

Full content of EJ Insight is available at www.ejinsight.com. Copyright Hong Kong Economic Journal Ltd. Republishing and editing are forbidden without authorization from Hong Kong Economic Journal. If there are any questions, please contact Chris Yeung (chrisyeung@hkej.com) for editorial matters and Margaret Lor (margaretlor@hkej.com) for sales and marketing matters.

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