China Prices a ‘Smoothed Version of Reality’
February 17, 2014 Leave a comment
China Prices a ‘Smoothed Version of Reality’
ALEX FRANGOS
Feb. 14, 2014 7:03 a.m. ET
China’s economy faces many challenges. Rising prices aren’t one of them, at least according to official data.
Consumer prices in January were up 2.5% from a year earlier, matching December’s pace and within Beijing’s comfort zone. While such low inflation might normally make authorities feel safe opening the credit spigots, that’s unlikely to happen given the concern about the economy’s mounting debt load.
The number was lower than economists expected: The Lunar New Year holiday fell at the end of the month, and family gatherings and official parties often goose demand for food. Pork, especially, is a huge part of the inflation basket. But for the first time in a decade, prices for the other white meat fell in the run-up to the holiday, according to Capital Economics.
Pork aside, skepticism seems to be warranted when reading China’s inflation numbers. A paper published in January by economists Emi Nakamura, Jón Steinsson and Miao Liu of Columbia University suggests the country’s official inflation and growth data reflect a “smoothed version of reality.”
That’s not to say it’s totally wrong. The paper concurs with previous work that the general direction of the data is correct, but the peaks and troughs are more extreme than reported. It finds inflation in the late 1990s was lower than measured, and thus that real growth was higher. On the flip side, inflation in the 2005-07 period—often seen as the peak of China’s boom—was much higher than measured, and thus growth lower.
Political manipulation is one possible explanation, say the authors. Equally compelling, they say, is the simple difficulty of counting price changes in a fast-growing economy. As disposable incomes rise, consumers are constantly upgrading the quality of products they buy and venturing into new categories of goods.
The paper doesn’t examine the most contemporary data, but investors wouldn’t be crazy to think inflation is higher today than the official figures show. Tight labor markets are driving up wages, capital inflows from abroad are strong and money supply has grown faster than measured nominal GDP for several years. Property prices, not well-captured in inflation data, are rising sharply. Whatever the case, a true picture of China’s economy will be hard to find.
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