By TOM ORLIK
Supply shocks are once again charged with pushing up China's food prices, but it is a surplus of money, not a deficit of pigs, that is the real culprit.
As of Monday, the Ministry of Agriculture's index of wholesale food prices was up 2.2% from its April level, a turnaround after two months of falling prices. Pork prices, in particular, are on the rise. With food accounting for almost a third of China's consumer price index, an increase in prices suggests the markets should prepare for another increase in inflation when the data for May are released on June 14.
The usual suspects, bad weather and outbreaks of disease, are once again accused of causing the increase in prices. This time, a drought in the Yangtze River is in the dock, with a disease in the pig population charged with aiding and abetting.
It is easy enough to blame the weather for China's climbing food prices. But the reality is that China's own monetary policy makers are behind the steady rise in the CPI.
An increase in the money supply in 2009, with growth close to 30% at the end of the year, may have been a necessary part of the economic stimulus. But keeping relaxed monetary conditions in place so far into 2010 was overkill, and there is now a price to be paid in inflation.
There is a reason why it is showing up first in food prices. The agricultural sector is supply constrained. If an increase in the money supply results in an increase in demand for clothes or televisions, China's manufacturing sector has the capacity to meet it. If there is more demand for food, supply is less responsive and prices rise.
Higher wages also are playing a part. Agriculture in China is labor intensive. As China's demographic shift reduces the supply of workers, rising wages will continue to add to the cost of food production. Rising wealth also means demand for a higher-quality diet, with more meat. Chinese demand is contributing to higher global prices for corn and soybeans, key inputs for the production of pork.
In a country as large as China, there is always a drought, disease or flood somewhere that can be blamed for rising prices. But the real villains of China's inflation are structural and won't go away with a change in the weather.
Write to Tom Orlik at tom.orlik@wsj.com
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