Analysis: China's inflation overhaul clouded by data doubts

Chinese 100 yuan banknotes are seen in this picture illustration taken in Shanghai January 17 , 2011.

Credit: Reuters/Carlos Barria

Like a home renovation that reveals old cracks, China's overhaul of its main inflation gauge has exposed long-standing problems in the reliability of official data.While some suspect that Beijing is intentionally seeking to mislead, the main worry is that the government has been far too slow to keep up with changes sweeping over the economy and so is not painting an accurate picture of the reality on the ground.
With China vaulting past Japan as the world's second-largest economy last year, questions about the quality of its data and whether the government is manipulating it are far from academic.
In the confusion about whether Chinese inflation is taking off or, on the contrary, nicely under control, prices of commodities from oil to iron ore and monetary policy decisions in developed and emerging markets alike hang in the balance.
China on Tuesday announced a 4.2 percentage point increase in the share of housing costs in the basket of consumer goods used to measure inflation. It reduced the weightings of a series of other items, notably food, which it cut by 2.2 percentage points.
That hardly solved the problem.
"Non-food price inflation is underestimated, not because of the weighting, but because actual prices are not being reflected in the CPI (consumer price index) itself," said Jinny Yan, an economist with Standard Chartered Bank in Shanghai.
According to the official data, annual consumer prices rose 4.9 percent in January. Economists polled by Reuters had expected 5.3 percent. For ordinary Chinese, something smelled fishy.
"Why did the government make the adjustment this particular month?" asked Vera Yuan, 29, an advertising designer in Shanghai. "Are they trying to shift public attention from high inflation?"
THE PRICE IS WRONG
In truth, the timing was not suspicious. Every five years, the National Bureau of Statistics conducts a major revision of the way it measures inflation.
What was concerning were its methods. Analysts worried that the agency had fallen behind the curve in the fast-growing Chinese economy and was resistant to subjecting its techniques to the sort of scrutiny that would bring about improvements.
"It is how they sample the data and do the statistics," said Wei Yao, an economist with Societe Generale in Hong Kong.
The new CPI weightings were emblematic of this. On the one hand, the changes were consistent with the evolution of consumption patterns in the Chinese economy.
But by placing extra emphasis on housing, the CPI basket now gives prominence to a deeply flawed set of price data that economists say will make reported inflation too low.