Pork Prices and Inflation

Are rising pork prices causing inflation in China? That question may never be asked in a highly developed economy like the United States where increases in prices at the gas pump are felt most directly by consumers, but it is a question that is being asked frequently these days in China where food is such an important part of the budget for most.

In fact, Professor Nie Fengyang, Director of the Division of International Information at the Chinese Academy of Agricultural Sciences, told me that she was confronted with that very question at a presentation she gave recently to a group of Chinese bank executives. I met Professor Nie this week at a United Nations World Food Programme function in Beijing that I attended, along with many Chinese agricultural officials. Professor Nie and her team study issues such as food security (ensuring that China has enough food to feed its population), specializing in meat.

Because pork prices only account for 3 percent of the consumer price index (CPI) in China, according to Professor Nie, she does not believe that China’s rising inflation can be laid at the feet of pigs. She concedes, however, that pork prices have been having a substantial impact recently. Pork accounts for approximately 64 percent of meat consumption/production in China, and rises in food prices have been accounting for approximately two-thirds of the total increases in CPI in past months.

In June, inflation in China surged to 6.4 percent, with pork prices increasing by 11.1 percent from the previous month. In June, the rise in pork prices alone accounted for 40 percent of the rise in the CPI from May. The only silver lining in this cloud over China’s economy is that non-food CPI was flat month on month, suggesting that food as a category is the main culprit for the inflation that China is now experiencing, and that these rises are temporary in nature.

Why the sudden rise in pork prices? Professor Nie cites three reasons. First, pork prices have been too low in recent years, causing many farmers to switch to the production of other types of livestock. Second, the price of corn has been rising. And finally, a bout of pig disease has interrupted hog supplies in the country. Pork is selling for 27 yuan ($4.17) per kilogram, the highest ever according to Professor Nie, and China is now importing pork for the first time since 2007. She expects pork prices to rise to 28 or 29 yuan before leveling off and declining after the Spring Festival holiday next year.

Rising pork prices are even making Andy Rothman, China Macro Strategist for CLSA Asia-Pacific Markets, “nervous” in his own words. Andy has been a calming voice on inflation all year, but the recent price rises have caused him to adjust his forecasts for the CPI. In his latest report, Andy has upped his forecast of 4.5 percent for the year to 5.0 to 5.5 percent, with pork the key factor determining whether the final number comes in at the top or bottom of that range.

Inflation is China’s number one economic problem today, and the government is treating it that way. The People’s Bank of China raised interest rates by yet another 25 basis points last week, and money is very tight. It’s only a matter of time before these tightening measures cause inflation to abate, despite high pork prices. The shortage of hogs is just making the government’s job that much more difficult.