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More Bad News for Chinese Inflation?

Tuesday, 15 Feb 2011 | 10:49 AM ET
Flag of the People's Republic of China
Eriko Koga | The Image Bank | Getty Images
Flag of the People's Republic of China

China's inflation number came in at 4.9 percent—with food prices jumping 10.3 percent.

What's worse? Those numbers may be suspect.

To begin with: Despite China's ugly inflation numbers, economists had predicted even worse results.

As Patricia Lui at Bloomberg reports, economists had forecast a 5.4 percent jump in prices.

Tracy Alloway at the Financial Times Alphaville weighs in on the lower than expected numbers by citing an ominous report in the English newspaper The Telegraph:

"there were suggestions that the figure had been 'massaged' after China’s National Bureau of Statistics (NBS) said it had changed the composition of the consumer price index basket, reducing the weighting of food. Spiralling food prices, after a bitter winter and a drought in northern China, are driving inflation after jumping 10.3pc in January. However, Brian Jackson, an economist at the Royal Bank of Canada, said the weighting of food in the overall basket had been reduced to 'around' 25pc from 33pc …"

So the takeaway may be this: Food prices, which are arguably the most crucial component of the index, may have been reduced as a component by as much as eight percent—downgrading them from a third of the market basket to just a quarter.

Alloway also links directly to a statement by The National Bureau of Statistics, which is China's equivalent of our bureau of labor statistics. The statement reads, in part: "Reports that the reweighting brought down CPI by 0.3 percentage points is inaccurate."

Indeed: If the Royal Bank of Canada's numbers are to believed the reweighting is far greater.

Alloway goes on to cite multiple analysts—with conflicting opinions.

Chi Sun of Nomura securities: "As such, we believe the CPI reading undershooting in January was not the result of CPI weight changes, but rather a reflection of a lower-than-expected seasonal impact of Chinese New Year on food and transportation prices."

And Jian Chang of Barclays: "… the change in weights did not contribute to the January’s below-consensus CPI Inflation, in our view."

But the degree of speculation—and the ultimate divergence of opinion—is enough to raise questions about the validity of the BLS reporting data.

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