Inflation in China Bucks Global Trend

25/8 2022 14:45

Wherever you look, inflation is on the rise.

Last July, across the G20 countries, it averaged 3.8 percent. This year, the number is 7.5 percent.

Consumer price inflation in Chinais third lowest among the G20 countries. Its headline rate ticked up 1.7 percentage points to reach 2.7 percent in July. This rate of increase was the second lowest among G20 countries (after India).

There appear to be two key factors that are keeping China’sinflation low and stable: China is not overly-dependent on crude oil and natural gas and its labour supply has remained robust.

The rapid run-up in global oil prices has been a major contributor to inflationary pressures. While the price of Brent crude oil recently dipped below $100 and it is some 30 precent below its March peak, it is still more than 40 percent higher than this time last year.

Most crude oil is refined into gasoline, diesel and jet fuel, which propel cars, trucks, ships and planes. Consumers face the consequences of an increase in crude oil prices most immediately at the gas stations when they fill up their cars. But oil price increases also ripple through the economy as it becomes more expensive to get goods and people from Point A to Point B.

The retail price of gasoline varies considerably among G20 countries. 

A litre of high-octane gas sells for as much as $2.10in the UK and aslittle as $0.62 in Saudi Arabia, where the government caps prices. Cheap and stable gasoline prices are part of the reason that Saudi Arabia’s inflation is among the lowest in the G20.

At $1.34 per litre, Chinese gasoline prices are pretty close to the G20 average. They are about 20 percent higher than the US’s and 20 precent below those in France and Germany.

Eventhough Chinese gasoline prices are at the world level, the run-up in crude oil prices has had a relatively modest impact on inflation here. This is because China’s per capita consumption of crude oil is relatively modest, only 40 percent of the G20 average. Indeed, Chinese people only consume one-fifth as much crude as their Korean, American and Canadian neighbours.

Car ownership in China is not as widespread as in many of the other G20 countries. This keeps per capita oil consumption down. In addition, China has a relatively high share of vehicles that run on electricity rather than gasoline. 

The price of natural gas is increasing even faster than that of crude oil.

The market for natural gas is not as globally integrated as crude oil’s and there can be large regional differences in prices. Thus, the price in Germany has tripled in the past year and is currently seven times as high as in the US.

The high price of natural gas is contributing to inflation in many, but not all, European countries. France, for example, is much less reliant on natural gas than Germany, Italy and the UK, as it generates a lot of nuclear power for its energy needs.