Song Mei Ai, a domestic helper in Shanghai, doesn’t generally spend too much time thinking about the consumer price index (CPI) but lately she has been paying more attention – pork prices in particular.
“I don’t buy pork anymore. It’s too expensive,” she said after a morning at her local wet market. “Even chicken is getting too expensive. I rarely eat meat now.”
Song’s situation is shared by millions across the country. A disease in southern China has killed millions of swine in the last year and a half that led to a 30% hike in the price of pork in May alone.
Meat is an important component of the CPI and recent high prices have caused some economists to raise inflation forecasts for the year.
The CPI rose 3.4% in May from a year earlier, according to the National Bureau of Statistics. Food prices jumped 8.3% while non-food prices increased a nominal 1%. Meat and poultry products rose the most – 26.5% and 37.1% respectively. The latest figures represented a 2.9% year-on-year hike in the CPI.
The importance of pork in China cannot be understated. It is the staple meat and a regular feature of almost every meal served in Chinese homes. The rapid price rise in May was serious enough to warrant a visit by Premier Wen Jiabao to pig farms in Shaanxi Province to allay fears that pork would become unaffordable. Wen said the government would “go all out” to keep pork on dinner tables.
Behind the price rise was an outbreak of blue-ear disease, a viral respiratory ailment, which led to the slaughter of 40% of the 45,000 pigs it infected between January and May. The number does not account for up to a million pigs killed last year.
But the outbreak was simply the latest driver of higher food prices. The cost of feed has jumped and demand, caused by rising wages, is escalating.
Meat makes up 7% of China’s CPI basket. Food as a whole accounts for about a third. Meat is so important that high pork prices may create inflationary pressures, said Hong Liang of Goldman Sachs in Hong Kong.
“[Meat] price pressures are likely to spread to eggs, fish and other food products,” she wrote in a report in late May. “Therefore, inflation in this food category alone is likely to drive year-on-year CPI inflation to 4% and above in the coming months.”
She raised her expectations of CPI inflation for the year from 2.6% to 3.6% and said interest rate hikes were likely to follow.
Counting the calories
Outside factors notwithstanding, more expensive pork is a symptom of an underlying trend.
Jonathan Anderson, chief Asia economist at UBS, said demand for agricultural goods has risen 3% a year since the mid 1990s, as a result of changing dietary patterns. Meat, dairy and animal fats now make up a quarter of the average caloric intake, compared to 6% two decades ago. These products are more resource-intensive, and resources, like arable land and water, have been falling short.
In May, Anderson argued that if the trend continues China will face even higher prices or more imports or both.
CPI inflation was also a concern in January, when it jumped to 2.8%, from an average of 1.3% during the first 10 months of 2006, driven largely by food prices.
However, while the impact of rising food costs is evident on prices in general, core inflation – which excludes food and fuel – has remained stable. It has not exceeded 1% year-on-year for the past five years, wrote Anderson.
“This does not mean the [central bank] won’t hike rates at all… but in the meantime, there’s still only moderate pressure on upstream prices.”