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The average income of the poorest families in Chinese cities has only doubled since 2000. That may sound reassuring until one realizes that food prices have increased by two-thirds during the same period. And when inflation is turning up primarily in the prices of food, as is the case today, these families are all the more vulnerable.
While the average family in China's towns and cities spends a quarter of its income on food, the poorest households spend close to half. So rising food prices hit the poorest households the hardest. Hence, it is not surprising that they are complaining.
What is to be done? Forget interest rates, even though this is the tool most people look to first to curb inflation. Higher borrowing costs will not bring food prices down. That is not to say that interest rates should not be raised - for example, higher rates would encourage companies to make more considered investment decisions, increasing the efficiency with which loans are made. But one should not expect higher interest rates to make much of a difference to inflation.
The government floated a more promising idea last week, suggesting that the level of subsidies to low-income households be linked to the rate of inflation. One may question whether allowing households to increase spending when inflation is rising would not just push prices higher. But that should not be a concern, because now inflation is being primarily driven by problems with supply rather than overheating demand.
Surveys and sales figures show that households have reined in real spending as inflation has risen over the last few months. Consumer confidence is low, which is hardly a sign of exuberant demand. So inflation-linked subsidies could help people struggling the most to cope with price rise (and given the strength of the government budget, this is something the government can easily afford).
A proper-level currency revaluation would help, too, by making imported commodities cheaper. More generally, though, the problem lies in the skewed pattern of China's economic growth. Over the past decade, the wealthiest families have seen the strongest income gains. A disproportionate share of China's income is paid out as profits rather than wages, to the benefit of company owners and stock market investors rather than ordinary workers. Those at the bottom of the income distribution table have been left behind.
In other words, the difficulties many families run into when prices rise are another example of how China's unbalanced economic growth model is not serving the country's interests.
The 12th Five-Year Plan (2011-2015) is built around a call to shift toward more domestically driven growth, supported by mass consumption and strong income growth. That change cannot come too soon.
The author is a senior China economist at Capital Economics, a London-based independent macroeconomic research consultancy.
