ARE CHINA'S INFLATION NUMBERS DEFLATED

UNCLAS SECTION 01 OF 02 SHENYANG 000248 SIPDIS SIPDIS E.O. 12958: N/A TAGS: ECON EFIN ETRD ELAB PGOV CH SUBJECT: ARE CHINA'S INFLATION NUMBERS DEFLATED REF: SHANGHAI 784 ¶1. Summary. Recent press and government reports put China's inflation rate at around six percent per year and attribute most of the rise to food prices, which constitute one third of the core index. However, a recent visit to local markets indicates that the real rate of consumer price inflation ) at least in this part of China - is much higher. A one-year comparison of a basket of staple foods showed increases in the range of 50-60 percent, and local consumers are clearly hurting. End Summary -------------- -------------- It's A Good Thing Inflation Is Low--Otherwise These Prices Would Kill Us -------------- -------------- ¶2. After listening and reading much inflation-related commentary in the press, Econoff decided to visit a local supermarket to investigate for himself. Armed with a grocery receipt from his first shopping trip after arriving at Post in December, Q006, he was able to construct his own crude &market basket8 for calculating inflation. Comparing item for item at the same store one year later turned out to be quite enlightening. Only one of the seventeen items on the list, instant coffee, showed no inflation at all. The increase for the other items ranged from 17 percent to 480 (four-eight-zero) percent, most prices rising in the 40-50 percent range. ¶3. While certainly not scientific, the comparison provides a fair insight into the problems faced by the local citizenry. The items on the list included primarily staple foods common to the Chinese diet. Pork and chicken prices had doubled year-on-year, rice was up 33 percent, cooking oil was up 17 percent, and bread was up 30 percent. ¶4. The really shocking increases were in the prices of fresh fruit and vegetables. Carrots and tomatoes topped the list, at well more than four times last year,s price. Lemons, papaya, and dragon fruit had all doubled, while apples and cucumbers had tripled. Despite the price increases, the store was jammed with shoppers jostling to get the first pick. -------------- Controlling Prices the Old-fashioned Way -------------- ¶5. Prices posted at a nearby traditional market were notably lower than at the &big box,8 western-style market visited at the first stop. A vendor in the traditional market, however, confided to Econoff that things were not all they first seemed: two key mechanisms allowed them to keep prices lower than those at the big markets. The first step, she explained, is to buy produce that failed to pass the larger store's stricter testing and inspection regime, cheerfully noting that the rejected goods were much cheaper. The second step, which she offered with a wink and a nod, is to raise the price slightly and, by adjusting the scale, make a corresponding reduction in the amount of food measured per kilogram. She explained that this avoided discouraging customers by posting really high prices. -------------- What Can You Do With the RMB -------------- ¶6. Econoff decided to add to his admittedly unscientific research by asking a sample of taxi drivers if rising prices posed a problem for them and their families. The response was uniform across the board: rising prices were a major and growing hardship. Most said they are dealing with the situation by eating more rice and less of everything else. Asked if the appreciation of the renminbi is making imported foodstuffs more affordable, one driver responded, "The only thing you can buy more of is U.S. Dollars. But you can't eat dollars, and they buy even less rice than the RMB." ¶7. While not rigorously accurate, the above brief survey indicates that food price pressures on local citizens are likely much greater than what is being reported by government statisticians and the local press, the incidence being greatest on low-income groups. Our purchases of equal amounts of identical items one-year later resulted in an overall price increase of 57 percent. Unless there is real deflation in the other parts of the core index, it seems clear that the government's numbers, at least as they relate to Northeast China, are substantially lower than they should be. SHENYANG 00000248 002 OF 002 WICKMAN