Sunday, March 29, 2015

2015-02 Relative Price Trends

Consumer prices increased 1.40% year-over-year in February, whereas purchasing prices fell 5.90% over the same period.  Based on this metric, China is in its 39th month of economic contraction.
Unfortunately for savers, this year’s Lunar New Year was more expensive than last year’s.  On the bright side, overseas Chinese that earned U.S. dollars abroad and then return to China for the Lunar New Year would have paid less for the same products this year. The exchange rate between the U.S. dollar and the Chinese yuan increased from ¥6.06 on January 31, 2014 to ¥6.25 per dollar on February 19, 2015, meaning a 3.14% increase in the value of the dollar.  The dollar price of Chinese consumer goods decreased 1.74% over the last 12 months, meaning China is experiencing consumer price deflation in dollar terms.

Lower than two percent consumer price inflation has led some commentators and policy makers to call for more easing by the central bank.  However, an economy with a stock market index increasing 58% in value measured in gold over a 12 month period is not an economy facing deflation.  New money creation is simply flowing into equity prices instead of consumer prices or commodities.