China’s Inflation Numbers Point in Both Directions

08/09/2011 2:55 pm EST

Focus: GLOBAL

Jim Jubak

Founder and Editor, JubakPicks.com

China’s rate of inflation increased to an annual 6.5% in July, from 6.4% in June. That is certain. What it means for the financial markets and China’s economy is all speculation at this point.

Going into the numbers, there was optimism that July would show that inflation had peaked. Some economists were even looking for confirmation through a drop in July’s reading, say to 6.3%. They didn’t get that.

But the July number may still be good news. Economists have been projecting that inflation would peak near 6.5%, sometime around the middle of the year.

And July’s number certainly doesn’t rule out that possibility. It merely says that we’ll have to wait for August data to know what the trend looks like.

Some of the underlying numbers support that idea that inflation may be peaking. Industrial production rose by 14% in July from July 2010. That was less than the 15.1% year-to-year increase in June, and below the 14.6% median projection among economists surveyed by Bloomberg.

The culprit in July’s climb to 6.5% was food inflation. Food prices rose at a 14.8% annual rate, compared to a 2.9% increase in non-food prices. The price of pork led the way with a 57% jump.

The uncertainties in the inflation trend means that global markets can’t count on a massive wave of enthusiasm from Chinese investors to stem sliding stock prices just yet.

If Chinese investors were convinced that Beijing had seen enough progress on inflation to end the threat of further interest-rate increases, it would go a long way to reversing the slide that has sent the Shanghai stock market into bear-market territory.

If an end to the fear of more interest-rate increases were combined with a belief that China’s economy would avoid a hard landing, with growth staying well above 8%, then I think Shanghai could rally strongly enough to reverse the current global sell off.

Not this month, on this data, I’m afraid. But at least the numbers don’t represent more bad news to pour on financial markets around the world that are already swimming in it.

Full disclosure: I dont own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did not own shares of any stock mentioned in this post as of the end of June. For a full list of the stocks in the fund as of the end of June, see the fund’s portfolio here

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