China's annual consumer inflation eased to 3.4 percent last month from 3.6 percent in March but food prices were 7 percent higher from a year earlier.
“The risk is that food prices are high (and) they could go higher. That takes a real bite out of real consumption. You are left asking what are the genuine growth drivers here?” Ben Simpfendorfer, Managing Director, Silk Road Associates, said on CNBC Asia’s “The Call”.
As rising food prices eat into consumer spending, China will find it more difficult to ramp up household consumption, which accounts for about 34 percent of China’s GDP, according to Simpfendorfer.
China has been trying to rebalance its economy to become more dependent on domestic consumption rather than exports. But rising costs, especially of food that makes up over 30 percent of Chinese household expenses, according to the United Nations Food and Agriculture Organization, could scuttle these plans.
Tomo Kinoshita, Chief Economist Asia ex Japan at Nomura International, who forecasts inflation will rise above the government target of 4 percent by the end of the year, adds that the price rise won’t be limited to food, but will be seen across the board for consumer goods.
While wage hikes can help soften the impact of rising prices, Simpfendorfer says real inflation figures are much higher and the CPI (consumer price index) data released by the government are downplaying the price pressures building in China.
“The actual inflation numbers are likely much higher (than official government figures). We have been touring some third-tier cities recently like Shouguang, when you talk to locals they say (inflation) figures of around 10 percent are certainly reasonable,” he said.
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