Today, China’s CPI number in May came out lower than last month, declining from April’s 8.5% to 7.7%. Here is a closer look at China’s inflation number with trends from 2007.

CPI food component is still too high and it has been hoovering around 20% since early 2008. Be reminded food consumption in China accounts for almost 30% of personal consumption expenditure. The most recent food inflation number reads at 19.9% (see chart below).

(click to enlarge; source: NBS China and author’s own calculation)

If you multiply food inflation, 20%, by food consumption weight 30%, you get food’s contribution to overall inflation: 6% alone. How come the overall inflation is only at 7.7%, without even counting other big components?

My guess is that government’s subsidy in gasoline makes the overall inflation look much more benign than it actually would be, if letting the market sets the price. The communication and transportation component of inflation actually has been experiencing a deflation (see chart below).

Well, aren’t we having an oil shock in the world right now?