Tuesday, February 15, 2011

Chinese Inflation at "4,9%" Despite Lowering of Food Component; British Inflation at 4%

For the past few months data has not really mattered to the market but for informational purposes, worth sharing a few tidbits. 

First, in China - despite the inflation figure being smirked at, market participants still keep a close eye on it.  The Chinese have figured out the American way of government statistics... when you don't like what the data is telling you, change the inputs.  Food inflation is getting out of hand so the Chinese government has decided to reduce it's weighting in the index.  Presto magic - inflation has gone down.  Don't laugh - because this is what the U.S. has done since the early 90s in multiple government reports.
  • Consumer prices in China rose 4.9% in January when compared with the same month a year earlier, the government reported Tuesday, as inflation continued to bedevil the economy. 
  • The rise in prices was less than expected, but some economists said the data was difficult to judge because the statistics bureau recalculated the index to give less weight to food costs and more weight to housing costs. Those shifts and other changes designed to catch up with consumption patterns made it impossible to directly compare the January data to earlier months. 
  • While food prices rose most sharply, the costs of a broad array of other goods and services also ticked upwards. “This shows a broadening of inflation away from just food,” said Paul Cavey, head of China economics at Macquarie Securities.  
  • Nearly half of the employers in mainland China said they raised salaries between 6 percent and 10 percent last year, the survey showed. 
  • The producer price index, which tracks wholesale prices, rose 6.6%, reflecting higher wages, commodity prices and other costs. Economists at Australia and New Zealand Banking Group wrote that labor shortages have spread widely through China’s coastal factories and are likely to drive salaries up further. 
I don't want to spend too much time on the specific figures out of China, because even the Chinese people scoff at what is being reported.  


Second, in Britain - which is probably the best comparable to what is really happening in the U.S., inflation hit 4% aka double the target rate.  Why so high in Britain yet so low in the U.S.?  British consumer inflation does not have an "owners equivalent rent", whereas that is the largest component in U.S. consumer inflation figures (CPI).   Considering Britain has entered a period of government austerity, but accounting for an increase in VAT tax that just hit (from 17.5 to 20%), it is most likely that if the U.S. measured inflation similar to Britain (700 goods and services) we'd be closer to 4% than 0%.  But that would not be convenient for "no inflation here" Bernanke to justify printing to his heart's content.

To keep easy money flowing, the UK central banker is going under the guise of "we can not do a thing about it" which is the 'hear no evil' defense.  (which is ironic because a central bank is supposed to create price stability - posing the question of why do you exist if you can't do anything about price dislocations?)  That differs from the U.S. 'see no evil' defense - whatever it takes to keep the spigots on full blast.
  • Inflation in Britain rose to 4% in January, the highest level in two years, after the government increased a sales tax and the price of oil continued to climb.  
  • The figure forced Mervyn King, the governor of the Bank of England, to write a letter to the Treasury explaining why inflation rose above the bank’s target. It was Mr. King’s fifth letter of that kind in a year. 
  • In the letter, Mr. King blamed the price increases on higher commodity and energy prices and a rise in sales tax. He also said inflation could climb to almost 5% in the next few months, higher than the Bank of England had previously predicted
  • “There is a great deal of uncertainty about the medium-term outlook for inflation,” Mr. King wrote in the letter, which was published on the Bank of England’s web site. “As the temporary effects of the factors listed above wane, inflation will fall back so that it is about as likely to be above the target as below it two to three years ahead.”

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