As China's Inflation Declines...

10/18/2011 6:30 am EST


Jim Jubak

Founder and Editor,

Looking inside the numbers, MoneyShow’s Jim Jubak expected that China’s inflation rate would decline in September, and this may have important implications for its economy and stock market.

For the week ahead, watch Chinese inflation. The numbers for September came out on Friday, October 14, and the direction is really important.

What we’ve had is inflation seemingly hit a peak of 6.4% in June. That’s higher than the Chinese would like. It was a danger, blah, blah, blah, but then it’s been coming down. So, it was 6.2% in August and 6.1% in September.

Now, pretty much every investor in China is waiting for the People’s Bank to start cutting interest rates, but the People’s Bank is not going to cut interest rates until it has some assurance that this was not just a one- or two-month swing, that it’s really headed down. So, they were really waiting to see what happened in the numbers for September.

The numbers—it’s hard to get a grasp on inflation because you don’t measure the whole economy. At least, I can’t just by looking at it. But the one thing that I’ve been watching very carefully is Chinese food prices, because food is a very big part of the Chinese inflation index, much more so than in the United States because it’s a bigger part of the market basket.

In the last three weeks, the wholesale food index in China has been down about 5.3%. So, that’s clearly a pretty big move in a part of the period when they’re still doing the measurements, when they still care, and that tended to make me think that in September we were going to get a step down.

It may be 6.1%, and may go lower, but it really doesn’t matter exactly what the number is as long as the direction is still down, and if we get it down you’ll see more speculation about when the People’s Bank is going to cut interest rates.

And of course, since the stock market always anticipates things, you’re going to get more excitement in the Chinese market about trying to gain that cut in interest rates that will support a market that has really been in a bear for much of 2011.

Related Reading:

China Faces Its Own Debt Bomb
3 Crises Weighing Down Stocks
Is China Booming or Bursting?

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