August 8, 2011

The price increase of eggs in China has accelerated in July to fan inflationary expectations, even as the hog price gains have moderated slightly, according to the National Bureau of Statistics.

Average retail prices of eggs in 50 major Chinese cities have increased around 20% on the year in July, and have gained 5.1% over the past 30 days.

Pork prices, a main driver of inflation over the past couple of months, have started flattening out with the release of state reserves, dropping 0.5% during the final week of July from a week earlier-the second straight week of fall.

Nonetheless, other meat products, such as beef, mutton and chicken, have registered further price gains.

The recent surge in egg prices is partly the result of reduced output due to hot weather.

However, the main reason behind the price increase of eggs and non-pork meat products is substitution-people start buying other high-protein food items when pork prices rise too high. In another word, the egg price cycle is simply a reflection of the pork cycle.

This is partly why pork's impact on consumer price inflation is so big-pork's weight in the food basket is about 30%, but, with the substitution effect, the actual impact will be far larger than what is justified by that ratio.