The National Bureau of Statistics (NBS) says that January’s consumer price index (CPI)came in at 4.9%. That was up from 4.6% the month before, but down from 5.1% growth in November. Crucially, however, the number was lower than many market watchers had expected – droughts have been crippling China’s wheat-growing areas, and food prices globally have been rising due to a combination of poor harvests, trade restrictions and speculation. Food prices rose 10.3% year-on-year in January, up from an already-high 9.6% rise in December.
The lower-than-expected CPI number might seem less puzzling when one takes into account changes the NBS made to the CPI basket beginning in January. Food, which formerly contributed 32.4% to the index, now contributes 30.2%. Also given lower weights were entertainment, sports and services (to 13.7% from 13.9%), health, medical and personal products (to 9.5% from 9.8%), home electronics and maintenance (to 5.5% from 5.9%), clothes (to 8.4% from 8.9%), and tobacco and alcohol (to 3.3% from 3.8%). The difference has been made up by a 4.22 percentage-point rise in the weighting of housing – which includes rents, but not housing prices – to 19.2% from 15%.
But hold off on the conspiracy theories: According to the NBS, the re-weighting of the CPI actually raised – not lowered – January’s CPI by 0.024 percentage points.
The rise can be explained in part by rising costs of home services (up 11.4% from 10% in December), rental costs (up 7.1% from 6.8% in December) and residence costs (up 6.8%, from 6.0%). Brokerage CLSA has calculated that more than 85% of the rise in the CPI in January can be attributed to rises in food and residence expenses.
The re-jigging did not come as a particular surprise. The NBS has expressed dissatisfaction with the CPI basket in the past – in particular its heavy emphasis on food – and says that it alters the basket every five years to reflect changing consumer patterns. But despite the bureau’s insistence that the re-weighting of the index is “smooth,” the process has revived real questions about the usefulness of the way CPI data is compiled.
In particular, a simple listing of the new and old weights of different components ignores changes within the components: The CPI’s food component now features different weights for items like grains, and it appears that there have even been changes to the weighting of specific grains.
Furthermore, most discussion of the changes to the CPI has made little mention or explanation of changes to the producer price index (PPI) basket, which some economists say may be even more significant. To date, the NBS has not released detailed information that would help to unravel the differences between the new and old measures.
Statistics in China have long been suspect. At one time, discrepancies with reality were intentional; today, most problems arise from the inherent difficulties of surveying such a large country. The NBS itself frequently issues revised figures for various indicators as clearer information presents itself. But the situation is not helped by a combination of willful obstruction – as exemplified by the lack of detailed information about the new CPI and PPI baskets – and continued political pressure to meet specific numerical targets for a wide range of economic indicators.
Still, the obstruction in this case is puzzling, given that the need for alterations to the CPI and PPI baskets is by no means a controversial idea. China’s consumer patterns are changing, and as average wages rise, the percentage of each family’s income devoted to food – while still high – is gradually falling. Attaching greater weight to housing costs, even if still leaving out property prices, is also a reasonable reflection of reality.
To what degree the aggregate inflation numbers are also a reasonable reflection of reality is less clear. Certainly, they are acceptably accurate indicators of overall trends over periods of months or years. In the short term, they remain approximations at best, and a source of suspicion at worst. While the wish for precision may ultimately be unattainable, Beijing and the NBS would do well to let the numbers speak for themselves.
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