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China's Inflation Increase - Not Just A Holiday Effect?

 February 09, 2012 03:23 PM

The increase in China's January annual consumer price index (CPI) to 4.5 per cent, from January's 4.1 per cent, ending a five month period of decline, has been generally ascribed to inflationary effects caused by China's Spring Festival (Chinese New Year). The Financial Times, for example, tagged its coverage ‘Spike blamed on food prices ahead of New Year celebrations‘. The FT's report noted: 'Chinese inflation jumped in January, breaking a streak of five straight monthly declines, but seasonal factors were largely to blame and price pressures were expected to weaken in the coming months.'

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It is certainly true that China's Spring Festival has powerful, and well known, distorting effects on statistical comparisons, and therefore undoubtedly not too much should be read into one month's figures. Nevertheless there are reasons to consider that the inflation increase was not purely a holiday effect.

As this blog has noted previously China's CPI is not, contrary to claims to the contrary, closely linked to China's money supply data but it is extremely closely tied to international commodity prices. In this regard it is important to note that since December the annual change in international commodity prices has stopped falling. This may be seen clearly in the end of the decline in the year on year data for the Dow Jones-UBS Commodity Spot Price Index – Figure 1.

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Furthermore year on year data somewhat flatter as they are affected by the base effects of the rapid rise in prices during the early part of 2011. If absolute price levels are analysed then commodity prices reached their recent minimum on 4 October 2011, since which they have risen by 8.2 per cent – Figure 2.

Figure 1

12 02 09 YoY

Figure 2

12 02 09 Index


Commodity prices, as always, show strong fluctuations and it would be too early to definitively state that a new round of commodity price inflation is taking place.

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