Let's take pork out of the picture

The growth rate of China's pork prices and the consumer price index reached new highs in October. The CPI grew by 3.8 percent and pork prices rose by 101.3 percent, contributing 2.43 percentage points to the CPI. In fact, rising pork prices have accounted for nearly two-thirds of the CPI growth on a yearon-year basis.

It is anticipated that pork prices and the CPI will continue to rise. Pork was priced low in January, having dropped by nearly 18 percent from December 2018 following the African swine flu outbreak. It was not until February and March that pork prices climbed back to the October 2018 level.

So, when calculating the year-onyear growth rate, the minimum denominator cannot be fixed until February or March 2020. Even if prices stay the same next month, the growth rates of pork prices and CPI will remain on an upward trend until February and March next year, because there is no fundamental improvement in pork production yet.

Let's take pork out of the picture

It will take time to transform the increased breeding of pigs into market supply. And the swine fever vaccines and incentive policies for pig farming also need time to take effect. As a result, pork prices will continue to rise until the first and second seasons next year, and may extend longer if no notable improvement in pig breeding happens. Since there is a long time delay for stimulating policies to have an effect on pork supply, macroeconomic measures will not quickly reduce prices, although they will stabilize expectations.

Some people fear that the increase in CPI growth rate and decrease in gross domestic product growth rate might indicate a risk of stagnation for China's economy. But the stagnation in developed Western countries in the 1960s and 1970s was due to their continued easy fiscal policy and lingering inflation, which created society-wide expectations for inflation. There are no such conditions in China.

A close look at China's current inflation indicates a structural difference between the producer price index and the CPI. In fact, there are notable differences within the CPI itself. Except for meats, the prices of other consumer goods and services have remained stable. And prices of industrial products have all fallen.

Growth margins of non-food prices have fallen for seven months in a row since April on a year-on-year basis. The producer price index dropped by 1.6 percent in October, 0.4 percentage points more than a month ago. And the means of production decreased by 2.6 percent, while means of livelihood increased by 1.4 percent.

Based on the different CPI and PPI trends and the fact that CPI increase is mainly because of food products, such as pork, the current CPI hike can be said to have been caused by structural supply problems.

Strictly speaking, price hikes of several commodities do not constitute real inflation. So aggregate demand management policies are not always the viable solution.

If the prices of pork and other foods are taken out of the picture, the CPI and PPI will show a downward trend. So what our economic policies need to cope with is not inflation but the potential risk of deflation. The recent changes in the PPI better reflect the trend of macroeconomic fundamentals. The main cause of the decreased PPI is the recent decline in investment. A considerable amount of industrial products are intermediate products for investment and further industrial production, so their prices are largely affected by investment demand and industrial output. In the first three quarters of this year, fixed-asset investment in the primary sector dropped by 2.1 percent.

Testament to the PPI's decline is the drop in industrial added value. In the first half of 2019, industrial sectors achieved a cumulative increase of 5.8 percent, down by 0.6 percentage points on the same period last year. Industrial sectors contributed 2 percent to GDP growth, down by 0.2 percentage points on a year-on-year basis. Although high-tech manufacturing, strategically emerging industries, instruments and apparatus industries got higher-than-average growth rates, the overall decline of industrial added value reflects a downward PPI.

The recent fluctuations in pork prices have given Chinese people a new understanding of the importance of ensuring a secure supply of agricultural and animal products. When talking about food security in the past, we mainly thought about self-sufficiency of grains. However, as people's living standards increase, it is also of great importance to ensure the supply of meat, eggs, milk and aquatic products. China is striving to build a global food supply network by expanding agricultural cooperation with Central Asian, European and South American countries, which offers new opportunities for the agricultural and ancillary industries in these countries.

But to ensure an adequate supply of agricultural products and foods, China should strengthen agricultural cooperation within the framework of the Belt and Road Initiative, expand agricultural trade and investment cooperation through multiple channels and establish stable and diversified import channels for agricultural products.

It should also make timely adjustments to its trade policies in accordance with price changes. Apart from pork, there are also severe shortages of other agricultural products and foods. China should adjust its import policies on a timely basis according to changes in domestic prices and the trade frictions with the United States. And it should stabilize expectations as a precondition for policy adjustments.

Monetary policy should place more premium on the real economy. The month-to-month decrease of core inflation and the PPI indicates an obvious negative output gap. So monetary policy should make reasonable adjustments and leverage the current stable expectation for inflation to shift the focus of monetary policy to stabilize the macroeconomy.

The author is a researcher at the National Academy of Development and Strategy at the Renmin University of China.

The author contributed this article to China Watch exclusively. The views expressed do not necessarily reflect those of China Watch.

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