You know the spiel. The west exported inflation to China and in return China sent us back deflation.
What’s more, the cosy relationship has been compromising the west’s ability to influence inflation rates via monetary policy ever since.
But how about this for a counter narrative?
Diana Choyleva of Enodoeconomics believes it’s not the export of deflation from China we should be worrying about at this point as inflation.
As she noted in a report last week (our emphasis):
While most global investors expect Beijing to manage successfully its transformation to a better-balanced development model, the minority who view the challenge as unsurmountable and expect some sort of crisis worry about China exporting deflation to the rest of the world. But my analysis suggests that it is Chinese inflation that markets will have to contend with in coming quarters.
China’s official GDP deflator shows inflation is quickening – and Enodo’s real GDP deflator reveals a sharper acceleration than the official measure – but the CPI, the gauge most investors follow, points to subdued price pressures.
Something does not add up. Inflation measured by the CPI has long diverged markedly from inflation measured by the GDP deflator. There should be a divergence, because they measure different things. Because the CPI fixes the weights of different goods and services based on their share in overall consumption, usually over the course of a year, it fails to capture any switches to alternative goods or services during that year.
But the difference now is too large to be explained purely by the deflator capturing the substitution of items whose price is rising fast with items whose price is rising more slowly, or vice versa.
According to Choyleva the main drag on CPI inflation in recent months has been food price inflation, which turned negative in 2017. The cause was a severe oversupply of fresh produce. Once food and energy is stripped out of the equation, however, China’s core CPI has accelerated to 2.3 per cent in September from 1.3 per cent in early 2016.
That said, it won’t be until China publishes its export and import price data for September that we will get a proper insight into what was going on last month, says Choyleva.
China treads closer to a day of debt reckoning – FT Alphaville
Don’t blame central banks for upcoming inflation, blame command economies – FT Alphaville