There's One Meaty Reason Driving China's Inflation

(Bloomberg) -- Mounting inflationary pressure in China may get a boost from rising prices for one of the country’s main dietary staples: pork.

Food prices are one of the biggest factors in consumer inflation, and one of the main components is pork. The meat accounts for almost 3 percent of the consumer price index, according to an estimate from Citic Securities Co. The government’s statistics bureau doesn’t disclose weights for components in the CPI basket.

Pork prices have collapsed on cheaper corn, the main feed for hogs, and greater production. Prices soared 33.6 percent year on year in May 2016, the most in more than four years, but have been falling this year. However, losses have been narrowing over the past four months, with fresh data showing a 10.1 percent drop in October.

That's happening as economists project faster consumer price increases this year and next. Faster price gains also may be welcomed by policy makers working to rein in financial risk as they help inflate away debt obligations.

"While inflation is still in the government’s comfort zone, pressures are broadening," said Lou Feng, an analyst at the Chinese Academy of Social Sciences, a government think tank in Beijing. 

Shoppers aren't seeing much inflation, thanks to food prices falling for the past nine months. The consumer price index rose 1.9 percent year on year last month, the most since January but still short of the government's 3 percent target. Economists surveyed by Bloomberg forecast it will pick up to 2 percent in the fourth quarter and 2.3 percent in the first three months of next year. 

But pressure is building. A core inflation gauge that strips out food and energy was steady last month, matching a six-year high of 2.3 percent.

There's One Meaty Reason Driving China's Inflation

Reduced price-supports for agriculture led to falling prices for various kinds of food, from grains to pork, said Wen Bin, a researcher at China Minsheng Banking Corp. in Beijing. Corn prices fell after authorities scrapped a longtime price support, which had helped hold down pork prices because it’s the main feed for hogs.

“The low-base effect means consumer prices, which are heavily weighted toward food, especially pork, are set to recover," Wen said.

There's One Meaty Reason Driving China's Inflation

 

Domestic corn futures in Dalian fell almost 20 percent last year as authorities scrapped a price-support program for growers. They’ve rallied more than 11 percent so far this year.

"The price of pork has a dominating role in China’s food price inflation," Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong, wrote in a recent report. Coupled with pollution control measures, he said, the pass-through from producer goods inflation “could have significant consequences for China’s inflation in 2018."

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