As we’ve been discussing since early Tuesday, the Chinese food inflation issue is suddenly the HOT issue.
And of course, since nobody can stop talking about QE2 it’s only logical that people are tying the two together, because, well, why not?
I’m not saying we’re in an undead homicidal zombie market, though we may be. But here’s an example of what the Pet Sematary market is capable of in terms of unintended consequences: QE inflates all asset prices, including commodities. This pressures the Chinese consumer, who we are relying on to pull us all out of this mess, who can suddenly not afford his new LCD TV because his Moo Shu pork Big Mac and fries is costing 20% more than it used to. Changes in commodity prices have a much greater impact on his consumption than Joe Schmoe in Idaho. The BoC has to raise rates to offset the inflation this is causing, hurting Chinese growth even more, and global GDP growth drops 50bp. Bravo the Bernank. With your Quantitative Easing you just killed off the only good thing in this market which was working naturally without outside interference.
Ok, we can kind of follow this, but does it the evidence stand up?
Well, fortunately the National Bureau of Statistics Of China has a really nice weekly series called Average Price of Food in 50 Cities that offers exactly what its title implies: the average price of things like Fuji apples, bean curd, Chinese cabbage, pork rump, pork belly and Japonica Rice.
Now, first of all, none of these things (with the exceptions of the pork products) are big, global commodities that would get inflated thanks to cheap dollar speculative buying. Nobody is taking cheap money to pour into Chinese cabbage, and yet… Chinese cabbage cost 2.65 yuan/kg this past week and 1.72 yuan/kg in the same week in 2009. That’s a whopping 50% gain! The cost of Fuji apples has jumped a bit more modestly: 7.34 yuan/kh to 9.62 for a 31% gain. So the jump is real.
But we can exonerate QE, by looking at the chance in prices from last November to this July, which is prior to Bernanke giving any hint of QE (people generally say the Jackson Hole speech on August 27 was where that idea got kicked off). Well it turns out that in July, Fuji apples were already at 9.71, and Chinese cabbage was already at 2.84 (both actually higher than they are now!). Let’s take pork rump, since that’s the title of this post: It was 19.76 yuan/kg in November of 2009, and then 20.85 in July 2010, so pre-QE we already got a 5.15 jump. You could go on, but the bottom line seems pretty clear: the connection between Chinese food prices and QE seems totally non-existent.
On the other hand, it’s widely believed, with some logic, that the yuan peg is putting quite amount of upward pressure on both the economy and prices, in part to due higher costs of imports. So we have a good explanation for inflation already. QE is almost certainly exonerated.
Right now pretty much everything is being attributed to QE, but the evidence is in each case fairly thin that it’s making a huge difference either way, and though it may have negative ramifications, we can feel fairly comfortable it’s not what’s causing the average Chinese citizen to pay more for a hamburger, and thus buy fewer TVs.