Why The Urban Chinese Need to Pay More For Their Food

Inflation worries have translated into consumer worries in China

But they need not worry in terms of non-food sales

Most people have a knee-jerk reaction to the word “inflation” – that it is bad. This is especially so when the idea of food price rises are brought up – leading to visions of panic food buying, long queues and empty shelves at the supermarket and the threat of rationing. In some ways, there was perhaps an element of this kind of reaction to the recently released Consumer Price Index (CPI) figures for February this year. Concerns about inflation in China rose following the announcement of the February figure on the 13^th of March. The 2.7% increase in the CPI was seen by some as uncomfortably close to 3%.

However, what this overall CPI number masked was that most (about two-thirds) of the growth in overall price inflation was coming the rise in food prices. In fact, the non-food portion of the CPI represented only a rise of 1%, the other 1.7% coming from food. Rather than panic about this, it is worth putting this into some historical perspective. The most crucial of these is that food prices have remained largely flat for almost a decade, and have only recently begun to rise. They are in fact catching up with growth in the consumer economy and consumer demand.

Most consumer demand in China comes from the cities – where little food is produced. Food has remained relatively very cheap for the average urban Chinese, and what this sharp growth in prices (edible oils up 17%, poultry up 15%, eggs 30%, fruit 8% and grain by 7%) is in reality more of a correction in prices in relation to demand, and the cost of production and delivery. The rise in food prices will actually help the economy, rather than create any slowing in the consumer economy. Higher food prices will put more money into the pockets of the poor rural farmers, 150 million of whole live on less than US$1 per day. If they can earn a more reasonable living from the crops they grow, so their chance of raising themselves above the poverty line, and becoming future potential consumers increases.