One of the big questions emerging out of Beijing’s decision to hike fuel prices last week is what effect it will have on inflation in China. Inflation has been a consistent headache for Chinese authorities over the last year. The rising price of food, particularly pork, has been the biggest contributor to rises in the consumer price index. Now fuel prices increases of 17% for gasoline 18% for diesel have been thrown into the mix.
But economists have downplayed the risk of fuel prices playing a big role in inflation. The increases will raise the CPI by less than one percent, RBS economist Ben Simpfendorfer wrote in a research note. It’s food that really matters. “The price of pork is more important to the average consumer than the price of gasoline,” he wrote. “Lower food inflation, and base effects, will temporarily cut CPI inflation by up to 2.0 percentage points in the next two months.”
With oil prices at record levels, the country’s refiners were facing severe losses selling gasoline at the below market rates mandated by the government. A move that will ease the pain of Sinopec and PetroChina will hurt the nation’s growing legions of car owners. But their numbers are still small, just 30 out of 1,000 in China compared to 450 per 1,000 in the U.S., according to Simpfendorfer. Cab drivers and farmers have been promised compensation for the added expenses they’ll face. But for factories that are already facing a tight squeeze in the weakening global economy and growing pressure from cheaper competition in Southeast Asia, the rising prices are yet another cause for worry.