May 26, 2011

After a brief correction in April led by vegetables, food prices have rebounded since mid-May in China as severe droughts hit China's main grain production bases in central and southern China.

According to data released by the National Bureau of Statistics (NBS) and the Ministry of Commerce (MofCOM), half of the 29 food items monitored by the government posted price increases during the 10 days from May 11 to May 20 compared with the first 10 days of this month.

Vegetable prices rebounded strongly in mid-May, gaining as much as 16% based on the NBS statistics and by up to 23% based on the MofCOM survey. More worryingly, prices for grains have gained further, as expectations are running high again for further grain price hikes due to the severe drought that has hit central and southern China. Three central Chinese provinces, Hubei, Hunan and Jiangxi, have been afflicted by severe droughts since March, leading to massive crop losses.

The inflation picture of China has become even more complex with the latest drought spell in central and southern China. Earlier in April, the collapse of vegetable prices has contributed to a slight easing of food price inflation, giving a ray of hope that inflation in China could be hitting a reflection point.

With the latest supply-side shock, it could take a little longer than earlier expected for inflation to peak. Considering that the pressure has come primarily from supply-side shock and that monetary tightening has started slowing down growth, the government may be more leaning towards using fiscal policy rather than monetary policy to address inflation going forward.