Inflation in China: Will Inflation Rear its Ugly Head Again?

Sunday, June 22, 2008 17:49
Posted in category The Big Picture

Was just on CNBC’s Squawk Box discussing increased costs in China, and one of the comments Martin Soong made was that with the falloff in ffod inflation, Beijing felt now was the time for the energy hike.

A hot topic last year, my concern at this point is that 2 large corn producing areas are now several meters under water. You have the flooding in south China.. and you have the flooding in the US… and while on the show I pointed that out (I really had no proof).

Once I returned to the office though, I consulted Dr. Google to see what the prognosis was, and here is what I found:

World Bank raises China inflation forecast, and the first sentence in the article is:

The World Bank sharply raised its forecast Thursday for inflation in China, saying that while food price pressures were fading, there was a risk of a spillover into wages and the wider economy.

Xinhua article China’s inflation eases but prices to remain high says:

China has since last year introduced a series of incentives, including direct subsidies and government-funded insurance, to boost agricultural production.

As I am not an agro-economist, I am going to have to punt it here, but I have seen a lot of coverage in the US on the impact of the midwest flooding on corn and how that will translate into higher pricing for nearly everything edible in the US.

There was a lot of talk initially about the 5.12 quake on pork prices given Sichuan is the largest provincial producer, but I have yet to see anything on the size/ scope of crop damage as a result of the recent flooding.

Isn’t it reasonable to assume that this will ripple into China as well given the sever flooding in southern China (lot’s of corn, veg, & fruit being grown there), and if true, what impact could that have for the broader Chinese economy?

Any thoughts?

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3 Responses to “Inflation in China: Will Inflation Rear its Ugly Head Again?”

  1. Dan says:

    June 22nd, 2008 at 8:12 pm

    Supply and demand. If the supply of food decreases due to a bad harvest due to weather, and demand remains the same, prices will rise. Now will someone please explain to me how Barack Obama can claim that allowing offshore drilling in the US will have “absolutely no impact” on oil prices in the US?

  2. Rich says:

    June 22nd, 2008 at 9:27 pm

    Dan

    that is my point as well, but where that point gets dangerous is that it is a cumulative clubbing over the head.

    As for ANWR’s impact on gas. It is pretty widely known that (1) it will take 3 years minimum to bring the crude to market and (2) with US only producing 3% / consuming 20% of world oil,even a 20% increase in US production will only result in a fraction of an decrease at the pump (let’s assume that demand in liters stays constant).

    It really is time to stop talking about spending billions on oil… it is a commodity with finite quantities. Maybe the US needs a real oil crisis to understand this, but I can only hope that the US won’t wait so long.

    either way.. I am betting 180 USD a barrel this summer… settling at 160.

  3. Rich says:

    June 24th, 2008 at 9:28 am

    Just received an interesting clip over my RSS Soybean Prices to Jump This Year on Soaring Cultivation Costs in China that only serve to show that we are more than likely in for more food based inflation this summer.

    For those that have not read Michael Pollen’s Omnivore’s Dilemma, or grown up in corn country, the global food chain pretty much depends on two things: Corn and soy… and quite often they are grown on the same fields.

    Taking into consideration that oil prices are up (higher fertilizer & transport costs), that yield are down, and that large areas of the US soy/ corn growing areas are under water, we are at risk of seeing rapid food inflation.

    R