China's food prices fall at fastest rate for 15 years, despite Western media spin 'deflation' is good news for profits

Kalyeena Makortoff
The Guardian
Thu, 08 Feb 2024 17:42 UTC

© Andy Wong/AP

A giant dragon lantern greets tourists near the frozen Houhai lake in Beijing. China will usher in the year of the dragon for lunar new year on 10 February.

China's consumer prices fell at their fastest pace in 15 years in January, as the world's second-largest economy sank deeper into deflation amid weakening demand.

Data released on Thursday showed that China's consumer price index tumbled last month, falling by 0.8% compared with a year earlier. It marks the fourth consecutive month of declines, as well as the sharpest drop since September 2009, when the global economy was still grappling with aftershocks from the 2008 banking crisis.

Food prices were the biggest drag on the headline inflation figure, having fallen by 5.9% on an annual basis, due in part to a 17% slump in pork prices. Fresh vegetables fell by 12.7%, while fruit dropped by 9.1%.

Comment: Meanwhile in the UK: UK food shortages 'alarmingly likely' next year, University of Belfast warns - malnutrition cases tripled in 10 years

China's economy has been struggling to recover from the Covid-19 pandemic after restrictions were lifted in late 2022. It has also been dealt a significant blow by the contraction in its indebted property sector, leading to the developer Evergrande being ordered to liquidate last month.

Comment: Remember how Western governments propped up 'too big to fail', corrupt, collapsing, private banks with taxpayers money, shouldering the public hundreds of billions of debt and then enforcing sinister austerity policies on society?

China's economy first entered deflation last summer, with prices falling at a faster pace since then. Its factories have also cut prices, with the latest producer price index pointing to a 2.5% drop in annual prices in January, after a 2.7% fall in December.

However, ING's chief economist, Lynn Song, said it was worth noting that the latest data may be skewed due to the fact that lunar new year falls in February, rather than January, this year. It means that household demand for food such as pork could bounce back once next month's data takes the holiday season into account.

"While a far cry from the above-target inflation levels seen in many other economies, these numbers do not imply China is stuck in a deflationary spiral," Song said.

"Considering the more favourable base effects for February's data, we see a high likelihood that January's data could mark the low point for year-on-year inflation in the current cycle," she added.

However, the prospect of fresh economic stimulus from Beijing to counter weaker demand was enough to send Chinese stocks higher on Thursday, with the Shanghai Composite rising by nearly 1.3%.

"While a very concerning sign for China's economy, which could be becoming entrenched in a debt and deflation cycle, the markets arguably responded in a positive way to the news," said Kyle Rodda, senior financial market analyst at capital.com.

"Perhaps markets see the terribly low number as a potential catalyst for more muscular monetary or fiscal stimulus from the central government, which, up until this point, has been moderate in applying countercyclical policy."

Comment: It's obviously a complicated issue, made worse by Western media spin, but, for further insight into the implications into the deflationary issue, Asia Times reports:

So-called China deflation is good news for profits

To gauge price behavior, rather than the overall index number, economists look at so-called "core" consumer price inflation that excludes volatile food and energy prices - except when it comes to China.

"China sinks deeper into deflation as prices fall at fastest rate in 15 years" was CNN's headline this morning. But the 0.8% January drop in China's consumer price index reflected a 17% drop in pork prices. Core CPI rose by 0.4% in January. That's 4.7% core inflation at a compound annual rate - hardly consistent with deflation.

Besotted with the notion that China's economy is collapsing, the Western media interpret every economic report from China with that bias - even if it means turning common sense and causality inside out. A simple examination of China's recent price data tells a different story.

The Producer Price Index (PPI) — the cost of wholesale goods - continued to fall while core consumer prices rose. That's a problem for producers of nylon fiber (for example) whose prices have fallen by 12% year-on-year, but it isn't necessarily a problem for the overall Chinese economy.

The good news is that rising consumer prices and falling producer prices boost corporate profits. Industrial enterprises are charging higher prices to consumers - and paying lower prices to suppliers.

China's PPI isn't exactly a proxy for industrial input costs, and core CPI isn't exactly a proxy for final prices, but industrial profits have risen with a falling PPI and a rising core CPI during the past dozen years.

A linear regression equation (using breakpoint analysis) shows that year-on-year changes in core CPI and PPI explain about 76% of the variation in year-on-year industrial profits. The predictive variables are significant after correction for serial correlation.

Broad measures of price performance conceal opposing trends. Auto prices are falling in China due to rising productivity and ferocious competition among automakers, and that's a good thing.

Housing prices are falling, and that's a mixed thing: It's bad for older Chinese who have most of their savings in property and good for young families looking for a home.

But econometric analysis strongly supports the notion that falling producer prices and rising consumer prices are good for industrial profits.