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Is the China CPI the China Pork Index?

09 May 2012
Rabobank

CHINA - For the country’s decision–makers and the general population, the Consumer Price Index (CPI) is one of the most watched indicators. How the China CPI actually works is not readily transparent but the pork price has a significant influence on CPI, according to Rabobank.

In its latest report ‘Is the CPI the China Pork Index?’, Rabobank admits it is fair to state that CPI in China could confusingly stand for ‘China pork price’. However, referring to the China CPI as the China Pork Index may be a hasty generalisation. Even though the pork price has a significant influence on the CPI, it does not explain the entire picture.

By identifying the consumers’ consumption basket, Rabobank has taken a fundamental approach to explaining both how and why the China food CPI fluctuates so much. With this approach, Rabobank should be able to evaluate whether or not it is fair to refer to the China CPI as the ‘China pork index’.

Although the magnitude and volatility of the China CPI are at uncomfortable levels, it does reflect consumers’ concerns about ever–increasing and unpredictable food prices. It is fair to state that pig meat, being an essential component in the Chinese diet, is a fundamental factor in keeping social harmony.

A large portion of the China food CPI is due to pork’s large share in the CPI basket and its high price volatility. Thus, Rabobank admits that it is fair to state that CPI in China could stand for ‘China pork price’. However, referring to the China CPI as the China Pork Index may be a hasty generalisation.

Even though the pork price has a significant influence on the CPI, it does not explain the entire picture. Pork and vegetable price volatility in China is mainly caused by the mismatch between consistent demand and volatile supply. Therefore, we can assume that China’s problem of curbing food CPI volatility could be partly solved by an improved mechanism for managing pork price volatility, according to Rabobank.

Looking towards the future, Rabobank believes pork will remain the key contributor to volatility in the China CPI. Thus, being able to predict pork price fluctuations could give clarity to China’s CPI outlook.

Moving forward, Rabobank developed a proprietary forecasting model for China’s food CPI and the results will be published regularly.

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