China: riding the hog cycle

Could rising food prices come back to haunt China’s leaders once more? A sharp increase in inflation, revealed in economic data published at the weekend, was driven largely by a jump in the food index.

Consumer prices rose 3.2 per cent in February, compared with 2 per cent in January, with food prices rising 6.0 per cent, up from 2.9 per cent in January. And, if Stephen Green of Standard Chartered Bank is right, there could be worse to come.

The non-food index was up as well but by only about 2 per cent. The big contributors to inflation were meat (excluding pork) followed by grains and eggs.

Green predicts food inflation rising further in 2013. As he notes, “pork – the biggest driver of inflation over the past decade—has not even begun to add to overall inflation yet.” Indeed pork prices actually fell by 1 per cent in February. This effect, he says, “will reverse in March even if pork prices stay flat” because the comparisons will be with the period between March and August 2012 when pork prices fell sharply by 16 per cent cumulatively.

In few places in the world does the hog cycle matter so much to inflation as it does in China because pork is so widely eaten in the country. Pork supply growth will turn negative this year, adding to pressure on inflation.

Standard Chartered is estimating that pork prices will rise 16 per cent in 2013. “Given that pork has a 2.9 per cent weighting in the CPI basket, this would add 0.45 per cent to headline inflation this year.”

So far, so moderately alarming, but could it get worse? Coinciding with the inflation figures news emerged that more than 2000 dead pigs had been found in the Huangpu river in Shanghai. The city’s agriculture department has determined that the pigs died of porcine circovirus. Shanghai city authorities have been testing the water quality of the river hourly and have found it to be safe.

What the news of a pig epidemic in neighbouring Zhejiang province means for China’s battle with inflation this year is rather more unpredictable.

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