3 reasons why the surge in global grain prices won’t lead to inflation in China21 July, 2012, 20:09. Posted by Zarathustra
Drought in the US has triggered rallies in a few food commodities. Some days ago Barclays Capital suggested that because of poor macroeconomic outlook, improvements in logistics and lower energy costs, emerging markets economies should be able to cope with the recent rise in global food price.
Now, let us move more specifically to China. The recent rise in global food prices is a risks that should not be ignored for China for obvious reason, according to Barclays capital. Food inflation, after all, has been the key contributing factor for China’s overall CPI inflation in recent major bouts of inflation (see chart below). Higher inflation at this moment in time could very well be judged by the market as rather unfortunate for China as it could limit monetary easing action from the People’s Bank of China (*).
But Barclays Capital believes that the risk of a near-term food inflation is low. We could summarise their findings into the following 3 main reasons why rising global food commodities prices should pose little risks to domestic food inflation, and hence the overall inflation.
- Food inflation remains largely domestically determined. Benign weather conditions and the pig production cycle point to stable meat and grain supplies ahead.
- China is self-sufficient for wheat and rice. Despite rising import reliance on corns and soybeans, the immediate pass-through is smaller than its longer-term impact.
- An important transmission channel is through inflation expectations, and hoarding and speculations. That tends to be reinforced in an inflationary environment.
Source: National Bureau of Statistics
(*) We should point out, however, that China’s inflation target is 4%, and the latest read on a year-on-year basis was 2.2% (YTD average = 3.3%), thus we suspect that food prices will need to rise in the second half of the year very significantly before the PBOC has no alternative but to stop easing. For the time being, the apparent bottoming of home prices appears to be a bigger factor in limiting policy easing.