Sunday, February 22, 2015

2015-01 Relative Price Trends

Consumer prices increased 0.80% year-over-year in January.  Purchasing prices decreased -5.20% over the last twelve months.  This adds another month to China’s contraction in the structure of production, which has now lasted 38 months.

This year’s January data is impacted by the fact that last year’s Lunar New Year was in January, but this year falls in February.  The Lunar New Year in China is a time of pent-up consumption as much of the migrant population returns home and spends time off with family.  We can hope that consumer price increases continue to decelerate into negative territory so that this year’s Lunar New Year is less expensive that last year’s for all of the people that saved money throughout the year.  Ideally, the price of everything would fall to five mao.

Most of the analysis done after the release of this data by very well-paid people has been advocating more of the same.  Ms. Xiaoping Ma of HSBC said “We still don’t see any positive effects of the stimulus measures put through at the end of last year. Obviously, policy makers need to do more.”  Dariusz Kowalczyk said “There are very strong arguments from all directions of a need for monetary easing.

These price trends are not happening for unexpected reasons that only central banks can fix with knee-jerk reactions.  The real root cause of this downward cycle was only partially mentioned in the Wall Street Journal article that quoted the above economists.
"Falling prices can also make debt more difficult to repay, a big issue in China where local companies are saddled with huge liabilities assumed after the 2008 global economic crisis. Fitch, a global ratings agency, estimates that the stock of debt—mostly corporate—in China’s economy had risen to 242% of gross domestic product by the end of 2014, up from 217% a year earlier."
The cost of debt in the future is not important if there had not have been so much debt built up in the past.