Lydia Wang, a 28-year-old marketing manager in Shanghai, gripes that the shoes and clothing she normally buys are at least 50 percent pricier than in 2009. Wu Sengyun, a 54-year-old retiree living in the coastal city of Ningbo, Zhejiang, says prices of fruit and fish are both up more than 20 percent. Willy Lin has cut back on serving free drumsticks in the canteen of his Jiangxi clothing factory as meat and vegetable prices climb. "The workers suffer," he says. "Everybody is crying."
Officially, China's consumer price inflation topped out at 3.3 percent in July from the year before—a 21-month high. The government says the spike is a one-off caused by crop damage in recent flooding. Other costs, they say, such as cars, mobile-phone bills, and clothing, are actually falling, and price increases should slow as the economy cools. At an Aug. 12 press conference, Pan Jiancheng, a deputy director in the statistics bureau, announced that the inflationary threat was "overhyped."
Many consumers, investors, analysts, and academics disagree. "There has been a jump in prices that isn't reflected in the numbers," says Chinese Academy of Social Sciences economist Yu Yongding, who formerly served as an adviser to China's central bank. Michael Pettis, a finance professor at Peking University, wonders how a country that grew 10.3 percent last quarter and is seeing upward pressure on wages could register inflation of only a few percentage points. Another sign of rising prices: Multinationals in China expect to hike wages an average of 8.4 percent this year, according to human resources consultant Hewitt Associates (HEW). Ordinary Chinese, meanwhile don't see the steep jumps in their housing, education, and medical expenses reflected in the official stats. "Inflation could well be 6 percent now for most people in China," says Pettis.
If the doubters are right, then the government has a serious inflation problem that it either hasn't figured out how to measure or has chosen to ignore. Other vital Chinese statistics—such as retail sales and unemployment—have also been murky. In the case of inflation, mismeasuring could prevent the kind of swift action needed to tame rising prices now—and force the government to apply much harsher measures later, such as a sharp increase in interest rates or a rapid appreciation of the currency to curb growth. The political risks are high, too: Social unrest in China often increases when ordinary workers can't keep up with the cost of living.
Unlike most countries, China refuses to release in detail how much weighting it gives different product categories when calculating inflation, a situation that World Bank senior economist Louis Kuijs calls an "oddity." An official with the statistics bureau says there has been no major change in the basket that makes up the price index since 2005. Plans call for adjusting the weighting next year to reflect housing costs more and food prices less, says the official, who declined to give her name because of agency rules.
Chinese consumers see firsthand how dramatically household expenses have changed in the last decade. Medical costs are the No. 1 concern for 84 percent of China's rural residents, according to a recent survey by the Economist Intelligence Unit. Officially, medical prices are only up 2.8 percent so far this year. That number does not include the cost of gifts to hospital doctors and administrators to ensure adequate care. Also at issue: rising apartment and rental costs that eat up more of Chinese budgets. For 26-year-old Beijing resident Wang Yulu, the monthly rent of her 35-square-meter one-bedroom apartment has just increased more than 20 percent, to $338. "It's too expensive," says Wang, who works in the Beijing office of a Hong Kong advertising company. "I'm thinking of moving."
Getting a handle on rising prices is a particular challenge in China. Hundreds of millions of rural Chinese keep moving to urban coastal areas, pushing up rents and food prices. The prices charged by millions of restaurants, coffee shops, and fitness centers go largely unrecorded as entrepreneurs evade taxes. A standard foot massage, popular in cities, has risen from around $10 in 2008 to about twice that today, says Zoe Wang, a 29-year-old strategy consultant from Shanghai. "Unfortunately, my salary didn't double," she says. Official figures record only a 0.4 percent rise in recreation and education costs this year. (Another oddity: China does not separate these two categories in its figures).
Residents in far western China face higher prices, in part because of the long distances products must travel to reach them. A fast-growing population of pensioners feels price hikes much more acutely than others. Says 54-year-old Beijing retiree Wei Mingxiang, as she shops in Beijing's Rundeli vegetable market: "Prices have gone up too far. My entire monthly pension of $147 is spent on food." One staple, cowpeas, recently doubled in price in two weeks to 40 cents a pound.
By releasing wheat, rice, and corn from its reserves, the government has avoided the 100 percent price surge that hit global grain markets in 2007 and 2008. Beijing continues to cap prices on everything from phone bills to water, electricity, and fuel, and when it wants to cool growth it orders banks to stop lending. "The government has tended to use less mainstream instruments that economists don't like so much," says the World Bank's Kuijs. "And they tend to use interest rates less." One-year deposit rates at 2.25 percent have not been changed since November 2008, which means Chinese savers are actually losing money now that inflation has passed 3 percent. Officials fear higher rates could draw speculators into China.
Some analysts think Beijing is doing a decent job of calculating prices. Arthur Kroeber, the Beijing-based managing director of economic consultancy Dragonomics, estimates that actual inflation may exceed the official figure by not much more than one percentage point. Kroeber does say that a tightening labor market and rising wages will push China into higher inflation in the coming years.
Others wonder whether the historic aversion of China's rulers to the political risks of inflation creates pressures to keep official figures low. Similar pressures help explain how official unemployment targets of just over 4 percent were met in 2008 and 2009, when China's factories laid off tens of millions of workers, say economists. "The government has made it quite clear" what its inflation target is for 2010, blogged Tsinghua University management professor Patrick Chovanec on Aug. 12. "A whole parade of official sources have issued statements over the past few weeks predicting—with the unruffled, enigmatic certainty one normally associates with a blackjack dealer dealing a fixed deck—that inflation will come in right at 3 percent this year."
The bottom line: Official inflation numbers in China are failing to reflect sharp jumps in housing, medical care, and other costs.
With Miao Han, Li Yanping, Penny Peng, Vincent Ni, and Helen Sun