Is the cost of living in China going up or not? According to official statistics, China is a in a deflationary spiral – prices have fallen for six out of the last seven months.
In July, the consumer price index fell by 1.9pc, the steepest one-month decline since 1999.
However, just before the weekend, the Commerce ministry made a shock prediction that prices would actually rise by 2pc over 2009, a move that puzzled economists.
"It’s just impossible," said Wang Qian, an economist at JP Morgan, to Bloomberg. He added that inflation would have to jump to more than 6pc a month for the rest of the year to bring the average to that level.
Economists at Goldman Sachs are predicting that prices will not start rising again until next year.
The deflation in China began with the financial crisis, with falling oil and commodity prices. Falling export orders at Chinese factories have resulted in lower prices too. US consumers are paying lower prices, so it’s reasonable to assume that Chinese factories have slashed their manufacturing prices in order to drum up business.
Since many of those factories also make goods for the Chinese market, wholesale prices have dipped inside China too. The price of clothes, cars, mobile phones and white goods has been steadily falling.
On the other hand, it is clear that the price of some things is still rising quickly. There’s inflation in the stock market, and in property prices. The cost of food is rising steadily, as are water bills. There has been an 8pc hike in diesel and gasoline prices from June 1, in addition to the 3.7pc to 5.3pc hike in late March.
In addition, commodity prices, such as iron ore and copper, have risen dramatically, and China’s money supply has expanded at breathtaking speed (Broad money grew by 28.5pc in June).
And all of this has come against a backdrop of solid economic growth. China has not suffered a recession, unlike the US and Europe. In the third quarter, growth is estimated to be 8.5pc. So it is hard to see how inflation is not taking hold.
One possibility is that China’s money supply has fed into investment – companies have expanded their facilities, infrastructure has improved and so on. The trillions of yuan of new cash have not trickled down entirely into people’s pay packets, so there’s less chance of prices rising in the short term. Indeed, if factories are more efficient, prices could even fall further.
Since the figures are untrustworthy, it’s impossible to be sure what is happening. However, the Commerce ministry’s prediction is worth taking note of – at the very least it signals that China’s period of deflation may be at an end.