Chinese Inflation Threatens the Recovery

China's National Bureau of Statistics (NBS) just released consumer price index (CPI) data for the country on Saturday and it is showing a massive increase in inflation. Consumer price increases are now at a 10-month high.

A large portion of the CPI increases came from soaring food prices during the Lunar New Year holiday. Compared to a year ago, the cost of food is up 6% and is at a 9-month high. Food prices account for about 30% of the CPI equation and contributed 1.98% to the 3.2% increase, according to the NBS.

The NBS has not shown much concern for the figures and cite the holiday season for the spike. Yu Quimei, an economist with the NBS played it down by stating, “Price fluctuation around this traditional holiday is mainly seasonal, and will likely ease later on. The CPI may cool in March.”

However, his interpretation is not unanimous. The ANZ Banking Group Ltd., Liu Ligang, sees lingering inflation pressures: “The upward trend for inflation is evident, fueled by the largely expanded credit and strong inflow of overseas capital. Inflation will be a serious problem in the second half [of 2013].” 

The inflationary pressure will limit what the Chinese government can do to stimulate the economy. While there are growing signs of stability and a mild recovery, factory output increased a mere 0.2% in the month.

There is some positive information for Chinese companies though. Compared to February 2012, there was a 21.8% increase in exports.

Inflationary pressure may create issues for the Chinese government if the economic recovery stalls and inflation persists. It currently has a 3.5% target for inflation, and this new data suggests there is very little room for more stimulus spending in the economy.

Ren Xianfang, senior economist at consultancy IHS Global Insight in Beijing put it this way: "The Chinese government is caught in the dilemma of dealing with slower growth and yet higher inflation again. The government's policy challenge for this year is to strike a balance between containing an asset bubble and pushing the economy out of the growth malaise."