One thing that the European Central Bank (ECB) does not lack is advice on tackling low inflation. This week the OECD added its voice to that of the IMF in April in urging prompt action, calling for a cut in the bank’s main lending rate, from the already low 0.25% reached in November to zero. The ECB’s governing council, meeting on May 8th (after The Economist had gone to press), was not expected to respond to this plea any more than it did to the IMF’s.The difficulty facing the 24-strong council is highlighted by the euro zone’s differing labour-market trajectories over the past decade (a period during which it expanded from 12 to 18 countries). Whereas joblessness has fallen in Germany, from 10.1% to 5.1%, it has soared in Spain, from 11.1% to 25.3%.High unemployment has contributed to the onset of deflation in parts of southern Europe. But even in northern countries inflation is low, and though it has risen in the euro zone as a whole from 0.5% in March to 0.7%
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China's consumer inflation edged up in March as food prices rose despite signs the world's second-largest economy is slowing.
Consumer prices rose 2.4 percent compared with a year earlier, up from February's 2 percent rise, government data showed Friday. The increase was driven by a 4.1 percent rise in politically sensitive food costs.
Producer prices, measured as goods leave the factory, fell by 2.3 percent in a sign of weakening economic growth, the National Bureau of Statistics reported. It was their 25th straight month of decline.
Inflation still is well below the official target for the year of 3.5 percent, leaving Beijing room to stimulate the slowing economy with interest rate cuts or other measures if necessary.
China's imports shrank 11.3 percent in March in a sign of weak domestic demand while manufacturing failed to pick up as it usually does following the end of the Lunar New Year holiday.
Premier Li Keqiang this month announced that China’s military budget will increase 12.2% to 808.2 billion yuan ($131.6 billion) this year.
The dominant narrative is that, as large as it is, the spending plan is roughly in line with the expansion of the Chinese economy. For instance, Paul Burton of IHS IHS -0.35% Defence believes Beijing’s budgets are “broadly in keeping with recent year-on-year growth rates, tracking slightly above annual gross domestic product growth.” Samuel Perlo-Freeman of the Stockholm International Peace Research Institute agrees. Apparently using some variant of Beijing’s 3.5% inflation target for this year, he computes the after-inflation increase in military spending for 2014 as 8.4%, not too far from the official growth target of 7.5%.
This narrative is incorrect for two important reasons. First, it looks like there will be little or no inflation in China this year, so adjusting the nominal 12.2% figure to arrive at the real number is inappropriate. True, consumer prices rose 2.5% in January and 2.0% in February, but the producer price index fell during the period, down 1.6% in the first month of the year and 2.0% in the second. Because manufacturing is far more important to the economy than consumer spending, analysts are now worried that China is entering a deflationary period if it has not done so already.
IS CHINA’S economy underheating? Not long ago, many people would have scoffed at the suggestion. The country is known for searing property prices, hot-money inflows and the steam escaping from its financial furnaces. The stock of outstanding credit, broadly defined, climbed to over 180% of GDP at the end of 2013, according to the central bank, and over 215%, according to an even broader measure by Fitch, a ratings agency.
But house prices are slowing, exports are weak and shadow banking is losing ground to traditional lending. Forecasters expected industrial output to grow by 9.5% in the first two months of 2014, compared with a year earlier; it grew by only 8.6%.
Moreover, evidence of excess has long been absent from the traditional measure of economic overheating: inflation. New figures suggest that consumer prices rose by only 2% in the year to February, well below China’s average inflation of over 3% in the past decade. The prices paid to producers fell, again.
One way to reconcile the inflation number with other signs of excess is to disbelieve it. China’s critics routinely argue that inflation is higher than the government’s statisticians claim. But although it is easy to say the official figures are bad, it is difficult to quantify how bad.
That is the tricky task that Emi Nakamura, Jón Steinsson and Miao Liu of Columbia University set themselves in a recent study. They start with an economic law first observed by a 19th-century statistician, Ernst Engel: richer households spend a smaller share of their income on food. Thus as a household becomes richer over time, its spending pattern should match that of households who were equally rich a year or two before.
But in China, they discovered something different. They compared urban households in 2006 with households that were, according to the official figures, equally rich in 2008. They discovered that the later households were devoting 3-4% more of their budgets to food. Perhaps they were not quite as rich as their 2006 counterparts, after all.
