December 22,2009

China's 30-year CPI Growth Systemically, Greatly Under-counted

By Xu Yisheng


China's current statistical data system, CPI (consumer price index) is the most questioned. Recently, a spokesman from the National Bureau of Statistics said: "The change of CPI from negative to positive in November mainly resulted from increasing food and housing prices, and there is no inflation at present." This statement triggers dispute.


From the perspective of an ordinary citizen, we are not highly concerned about the CPI. What we care about is the purchasing power of our money and savings. If prices rise more than the increase of wages, savings or revenue, our purchasing power diminishes.


I would like to question CPI from the perspective of the purchasing power of money and review the 30 years of reform and opening up --- from 1978 onwards.


During that time there have been a lot of representative figures. In 1978 the national average monthly wage of workers was 51.25 yuan, and the annual average wage was 615 yuan. If a family member earned this wage, it could feed a whole family.


According to the National Bureau of Statistics, the cumulative increase of CPI over the past 30 years and 11 months to November, 2009, has been 5.7 times. Based on this index, the present average monthly wage of 292.1 yuan is equivalent of the purchasing power of 51.25 yuan of 1978. In fact, that 292.1 yuan doesn't equal the lowest social welfare insurance in Beijing in 2008 (390 yuan per month).


Let's look at the prices of some consumer goods.



In 1978, the price of flour was 0.185 to 0.22 yuan/jin (half a kg), while the flour price this month in Shanghai is 1.19 to 1.92 yuan/jin, a rise of 5.4 to 10.38 times.


In 1978, the pork price was 0.85 to 1 yuan/jin, while according to the China Price Information Network, the price of fresh pork (rib meat, lean meat) at the end of November in 2009 was 9.59-11.39 yuan/jin, up 9.59 to 13.4 times.

In 1978, hairtail, a sea fish, sold for 0.305 to 0.38 yuan/jin. According to the China Price Information Network, it was 8.08 yuan/jin by the end of November, up 21.3 to 26.5 times.


High-grade alcoholic drinks and tobacco:

In 1978 Zhonghua cigarettes were 0.55 yuan/box, and Maotai Liquor was 8 yuan/bottle, while the current prices are 57 yuan/box and 828 yuan/bottle, way up by 103.6 and 103.5 times.



In 1978, a dress was 10 to 20 yuan, while at present it is 100 to 500 yuan, a rise of 5 to 50 times.



In 1978, Beijing subway fare was 0.1 yuan. The current price is 2 yuan, an increase of 20 times. (Beijing subway fare was actually 3 yuan before the price was lowered in order to encourage public transport.)


Medical care:

An operation for appendicitis in 1978 was 8 yuan. It is now 90 to 500 yuan, up 11.25-62.5 times.



In 1978, water was 0.12 yuan/ton, while the current price is 3.7 yuan/ton, an increase of 30.8 times.


In addition, because of the distribution system in 1978, urban housing was distributed according to plan. Now it is purchased based on citizens' own needs and finances. Before, education and medical care costs were very low. It is hard to measure their increase now.


It is quite plain even by these crude measures that an increase in CPI over the last 30+ of only 5.7 times is not credible. The problem is to what extent that number underestimates the decline in purchasing power of money?


How high a present wage buys the living standard achieved in 1978 with 51.25 yuan? In 2009, the minimum wage in Beijing is 900 yuan, and average monthly wage was 3726 yuan in 2008, which is 17.6 times and 72.7 times 51.25 yuan, respectively. If 3,000 yuan is used to measure purchasing power of 51.25 yuan in Beijing, it means 58 times, more than 10 times 5.7.


If CPI systematically underestimates the decline in purchasing power, it is of significance for the judgment of national well-being. The deposit interest rate over the past 30 years has always been coupled with CPI, and savers have supposedly received interest based on the CPI growth. If the ratio of CPI to the purchasing power of money is underestimated, it means that savers have suffered an enormous loss of purchasing power.


This is why people pursue other investment tracks when they perceive purchasing power of money declining, why investors' cash is pouring into already frothy stock and real estate markets.



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