Darn Them Piggies! Pork Prices & the Inflation Outlook for China
IMF Blog, September 11, 2011
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Bibliographic details
- Authors: Nigel Chalk
- Published: September 11, 2011
Overview
- Author: Nigel Chalk
- Date: September 11, 2011
- Central message: China’s inflation has been driven largely by volatile food prices rather than generalized overheating; a recent pork price shock delays but does not fundamentally alter the IMF team’s view that inflation should peak and then decline.
Inflation drivers and structural context
- China exhibits chronic excess capacity in a range of highly competitive manufacturing sectors, limiting firms’ pricing power.
- There remains an overall excess supply of labor in China (despite shortages of highly skilled workers), which helps keep wage growth from getting too far ahead of productivity.
- Investment is very high: the economy is investing almost half of its GDP.
- Two distinct manifestations of demand pressures:
- Asset price inflation, notably property prices, where administrative measures are used to restrain bubbles.
- Large and volatile food-driven inflation, due to tight supply-demand balances and weak/sluggish supply responses.
Food supply vulnerabilities and quantitative exposure
- China both produces and consumes:
- one-sixth of the world’s wheat,
- one-fifth of the world’s corn,
- one-third of the world’s rice,
- one-half of the world’s pigs.
- The agricultural structure and limited agricultural land constrain effective domestic supply responses.
- Food shocks are mostly domestically driven and cause amplified impacts on raw food prices; global food price increases exacerbate the situation.
- Pass-through dynamics:
- Initial shocks to raw food seep into other consumption items and nonfood inflation.
- These effects typically dissipate after about 6-12 months.
- Macro policy can dampen pass-through from food to other items but cannot directly address the fundamental supply-side sources.
Recent episode chronology and role of pork
- Early 2010: initial shock concentrated in fresh fruit, vegetables and grain in the first half of 2010, due mostly to weather.
- Late 2010: inflation began feeding through to other items, coinciding with a moderate easing of credit conditions toward the end of 2010.
- Spring of this year: inflation momentum started to fizzle, partly dampened by a tightening of macroeconomic policies.
- July: inflation peaked in July and was expected to retreat in the latter part of this year.
- Disruption: a hog cycle, compounded by localized pig disease, caused pork prices to skyrocket and re-start the transmission mechanism into broader inflation.
- Outlook for the pork shock:
- The current food price shock should be smaller than in the past because the hog-cycle will soon turn.
- The shock will postpone the return to lower inflation, but the effects should wash out reasonably quickly.
Policy implications and recommendations
- Given the ongoing transmission from pork prices into broader inflation, it would be premature to backpedal on macroeconomic tightening.
- Use of administrative measures for asset-price (property) bubbles remains relevant.
- Recognize limits of macro policy: it can help dampen pass-through but cannot substitute for addressing structural agricultural supply constraints.
IMF blog post: Darn Them Piggies! Pork Prices & the Inflation Outlook for China (Nigel Chalk, September 11, 2011).
Content in this bundle
- iMFdirect 博客: 可恶的小猪！中国的猪肉与通货膨胀, 2011 年 9 月 11 日
