HEARD ON THE STREET
MAY 24, 2010, 7:07 A.M. ET.
China's Inglorious Food Prices
By ANDREW PEAPLE
Food, glorious food? In China, policy makers may not be thinking about their stomachs so much as the headache food prices are causing.
Sharp gains in food prices recently have driven Chinese inflation: In April, as the consumer price index rose 2.8% year-to-year, food prices rose 5.9%. The weighting of food in the CPI basket is around 33%, so these gains are a crucial factor.
The jury's now out as to whether this will remain a problem. While there's been moderation in the price of some foodstuffs, strong demand in China's economy could keep the food-price bandwagon rolling—adding further to the case for tighter monetary policy.
Already there have been signs of some jitters. Poor weather contributed to a 10.7% year-to-year rise in grain prices in April. In response, state-owned agricultural company Cofco has been buying corn from the U.S. at levels not seen in a decade.
Other indicators suggest food-price inflation could yet be contained. Pork prices, the main contributor to overall food-price levels, have been steady, with overall meat and poultry prices falling year-to-year. Ting Lu, China economist at Bank of America Merrill Lynch, says vegetable prices are now dropping after a long period of steady gains. Garlic, for example, is 35% cheaper than its peak in April, having risen nearly sixfold in the past year.
Faced with such conflicting indicators, economic policy makers—not just in China—often play down the effect of food prices. After all, it's difficult to compensate for food-price shocks caused by the elements.
Still, there's evidence food prices aren't immune to policy changes: They rise along with other prices when demand becomes excessive, as increasing incomes and economic security spur consumers to spend more on food, as with any other component of the inflation basket. That, in turn, means policy makers can help tame inflationary pressure from food, rather than assuming it's all in the laps of the gods.
It's another reason Beijing should start winding down the economic feast.
Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved
Sharp gains in food prices recently have driven Chinese inflation: In April, as the consumer price index rose 2.8% year-to-year, food prices rose 5.9%. The weighting of food in the CPI basket is around 33%, so these gains are a crucial factor.
The jury's now out as to whether this will remain a problem. While there's been moderation in the price of some foodstuffs, strong demand in China's economy could keep the food-price bandwagon rolling—adding further to the case for tighter monetary policy.
Already there have been signs of some jitters. Poor weather contributed to a 10.7% year-to-year rise in grain prices in April. In response, state-owned agricultural company Cofco has been buying corn from the U.S. at levels not seen in a decade.
Other indicators suggest food-price inflation could yet be contained. Pork prices, the main contributor to overall food-price levels, have been steady, with overall meat and poultry prices falling year-to-year. Ting Lu, China economist at Bank of America Merrill Lynch, says vegetable prices are now dropping after a long period of steady gains. Garlic, for example, is 35% cheaper than its peak in April, having risen nearly sixfold in the past year.
Faced with such conflicting indicators, economic policy makers—not just in China—often play down the effect of food prices. After all, it's difficult to compensate for food-price shocks caused by the elements.
Still, there's evidence food prices aren't immune to policy changes: They rise along with other prices when demand becomes excessive, as increasing incomes and economic security spur consumers to spend more on food, as with any other component of the inflation basket. That, in turn, means policy makers can help tame inflationary pressure from food, rather than assuming it's all in the laps of the gods.
It's another reason Beijing should start winding down the economic feast.
Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved
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