The stock markets have had a mixed week so far.  On Monday the SSE Composite declined by 2.7%, before regaining a fraction of that on Tuesday to close up 0.1% and another 0.2% Wednesday.  Banks and real estate developers again led the decline.  Things weren’t helped by August car sales which, as I wrote Friday, Lehman Brothers had correctly predicted would decline, although by 6.2% rather than the 10% they predicted.  Some people are saying this decline is temporary, but on the back of several months of rising car inventories it is nonetheless ominous.

The most interesting news this week has been the slew of numbers released earlier today by the National Bureau of Statistics.  Of these the most eagerly anticipated, CPI inflation for August, was surprisingly good, coming in at 4.9% year on year, which is well below July’s 6.3% and also well below market expectations of around 5.5%.   The decline in CPI inflation was driven mostly by declining prices in pork and vegetable oil.

Quite honestly I am puzzled by this unexpectedly low CPI inflation number.  Part of me would like to conclude that I have been overly alarmed about the threat of inflation all year, and that inflation is no longer the risk that I always assumed it was.  That would certainly be good news, and would give the government greater room for maneuver on the money and credit side, although Mark Williams at Capital Economics says in his research piece today that he actually thinks there is a risk of deflation next year.

But I am still puzzled.  Money growth has been so rapid in the past couple of years, and probably credit growth too if you count all loans in the formal and informal banking sector, that it seems very strange that inflation could come down so quickly.  Is it possible that the huge decline in stock market prices and the smaller decline in real estate prices have had a correspondingly large impact in reducing money in the system?  Or did food prices shoot up so quickly early this year for what were extraordinary reasons, and now as they revert to some more reasonable level of implied inflation they are causing a sharp but temporary decline in inflation.  Or could it even be that price controls and other administrative measures (e.g.