In China, even the price of a foot massage has doubled. Every day, commentators continue to run the deflation argument. However, everywhere I look, I see the opposite.

Maybe I am living in a different place and time to these people but to give you an example, the other day I went to the local butcher to organise some lamb cutlets. The price was $49 a kilo! All I wanted was a few cutlets to take home, not the whole animal. I was sadly disappointed and left dejected and disillusioned and wondering which of the deflation promoting economists I should call to find out where I should go to get some food that would be getting cheaper each week not more expensive.

The other night I was watching an ‘esteemed’ financial commentator who said there was a 40 per cent chance the USA would have a double dip recession and a 60 per cent chance they wouldn’t. This was the reverse of his previous view that it was 60/40 the other way around. Of course, you need to be flexible in this day and age.

Well, what a revelation, what a prediction – whatever happens he will claim credit. If there is a double dip he will say, ‘Look, I was right’. And, if there is not he will also say, ‘Look I was right’.

Our view is that there will not be a double dip. We are not sitting on the fence here.

I will also make the following prediction – the stock market has a 50 per cent chance of going up and a 50 per cent chance of going down and, if it doesn’t do either of those, it will stay steady. Let’s wait a while to see if I’m right. Bet you a kilo of cutlets I have made the right prediction.

But seriously, global meat prices have hit 20-year highs. Lamb prices (remember my cutlets) are at a 37-year high. Coffee, another one of my weaknesses, has flown past its 2008 high and is selling at the highest price since May 1997. In January this year, sugar reached its highest price since December 1980. The price has retreated somewhat since then but is now again on the ascendancy.

Agricultural prices in China have surged this year with garlic and ginger prices up tenfold since the beginning of 2010.

Australia has the chance to be not only the quarry to Asia, but also the food basket to the growing middle classes.

The recent weather patterns we have witnessed across the world have only exaggerated the problems and this looks set to continue. Growing food prices will fuel consumer price inflation.

We continue to bang the table regarding our belief China will continue to diversify its reserves into commodities and commodities-based companies, further adding to inflationary pressures.

Recent reports yet again point to evidence China is reducing its holdings of US Treasuries and stockpiling resources.

Bloomberg recently carried the following news piece.

U.S. Treasuries fail to provide safety or liquidity when it comes to managing China’s $2.45 trillion foreign-exchange reserves said Yu Yongdi, a former central bank adviser.

“I do not think U.S. Treasuries are safe in the medium-and long-run,” Yu, a member of the state-backed Chinese Academy of Social Sciences, wrote recently in an e-mailed response to questions. China is unable to sell the securities in a “big way” and a “scary trajectory” of budget deficits and a growing supply of U.S. dollars put their value at risk, he said.

Even foot massage prices have doubled recently in China according to a further Bloomberg piece dated 26 August.

Lydia Wang, a 28-year-old marketing manager in Shanghai, gripes that the shoes and clothing she normally buys are at least 50 per cent pricier than in 2009. Wu Sengyun, a 54-year-old retiree in the coastal city of Ningbo, Zhejiang, says prices of fruit and fish are up more than 20 per cent in the past year.

Willy Lin has cut back on free drumsticks in the canteen of his Jiangxi clothing factory as meat and vegetables grow dear. “The workers suffer,” he says. “Everybody is crying.”

Officially, China’s consumer price inflation topped out at 3.3 per cent in July compared to a year before, a 21-month high. Officials say the spike is a one-off caused by crop damage from recent flooding. Other costs, they say, such as cars, mobile phone bills, and clothing, are falling, and pressure on prices should ease as the economy cools. At a 12 August press conference, Pan Jiancheng, a deputy director in the statistics bureau, said the inflationary threat was “overhyped”.

Consumers, investors, analysts and academics interviewed by Bloomberg BusinessWeek in its 30 August issue beg to differ.

“There has been a jump in prices that isn’t reflected in the numbers,” said Chinese Academy of Social Sciences economist Yu Yongding, a former adviser to China’s central bank.

Michael Pettis, a finance professor at Peking University, said he wonders how a country that grew 10.3 per cent last quarter and is seeing upward pressure on wages could register a price rise of a few percentage points. Multinationals in China expect to raise wages an average of 8.4 per cent this year, according to Hewitt Associates Inc., a human resources consultant.

Ordinary Chinese have yet to see increases in their housing, education, and medical expenses reflected in the official numbers, these analysts said.

“Inflation could well be six per cent now for most people in China,” Peking University’s Pettis said.

If the doubters are right, then the government has an inflation problem that it either hasn’t figured out how to measure or has chosen to ignore. Other vital Chinese statistics, like retail sales and unemployment, have also been murky. In the case of inflation, misjudging could prevent the kind of swift action needed to tame prices now, and force the government to apply harsher measures later, such as an increase in interest rates or an appreciation of the currency to curb growth. There are political risks too. Social unrest in China has been triggered when ordinary workers can’t keep up with the cost of living.

Unlike most countries, China refuses to release in detail how much weighting it gives different product categories when calculating inflation, a situation that World Bank senior economist Louis Kuijs called an “oddity”. An official with the statistics bureau said there has been no major change in the basket that makes up the price index since 2005. Plans call to adjust the weighting next year to reflect housing costs more and food prices less, said the official, who declined to be identified because of agency rules.

Chinese consumers, when asked, will detail how household expenses have changed in the past decade. Medical costs are the number one concern for 84 per cent of China’s rural residents, according to a recent survey by the Economist Intelligence Unit. Officially, medical prices are only up 2.8 per cent so far this year. That number does not include the cost of gifts to hospital doctors and administrators to ensure adequate care.

Housing and rising rental costs also eat up more of Chinese budgets. For 26-year-old Beijing resident Wang Yulu, the monthly rent of her 35-square-meter one-bedroom apartment just increased more than 20 per cent, to $338.

“It’s too expensive,” said Wang, who works in the Beijing office of a Hong Kong advertising company. “I’m thinking of moving.”

Getting a handle on rising prices is a particular challenge in China. Hundreds of millions of rural Chinese keep moving to cities, pushing up rents and food prices in urban coastal areas. The prices charged by millions of restaurants, coffee shops, and fitness centers go largely unrecorded as entrepreneurs evade taxes. A standard foot massage, popular in Chinese cities, has risen from around $10 in 2008 to about twice that today, said Zoe Wang, a 29-year-old strategy consultant from Shanghai.

“Unfortunately, my salary didn’t double,” she said. Official figures only record a 0.4 per cent rise in recreation and education costs this year. China doesn’t separate these two categories in its figures.

Residents in far-western China face higher prices in part because of the long distances products must travel to reach them. A fast-growing population of pensioners feels price increases much more acutely than others.

Said retiree Wei Mingxiang, 54, as she shopped carefully in Beijing’s Rundeli vegetable market: “Prices have gone up too far. My entire monthly pension of $147 is spent on food.” One staple, cowpeas, recently doubled in price in two weeks to 40 cents a pound.

By periodically releasing wheat, rice, and corn from its reserves, the government has avoided the 100 per cent price surge that hit global grain markets in 2007 and 2008. Beijing continues to cap prices on everything from phone bills to water, electricity, and fuel prices, and when it wants to cool growth the government orders banks to stop lending.

“The government has tended to use less mainstream instruments that economists don’t like so much,” said Kuijs of the World Bank. “And they tend to use interest rates less.”

One-year deposit rates at 2.25 per cent have not been changed since November 2008, which means Chinese savers are actually losing money now that inflation has passed three per cent. Officials fear higher rates could draw speculative investors into China.

Some analysts said that Beijing is doing a decent job of calculating prices. Arthur Kroeber, the Beijing-based managing director of economic consultancy Dragonomics, estimated that actual inflation may exceed the official figure but by not much more than one percentage point. Kroeber added that a tightening labor market and rising wages will push China into higher inflation in the coming years. Others wondered whether the historic aversion of China’s rulers to the political risks of inflation creates pressures to keep official figures low.

Similar pressures help explain how official unemployment targets of just over four per cent were met in 2008 and 2009, when China’s factories laid off tens of millions of workers, some economists said.

“The government has made it quite clear” what its inflation target is for 2010, Tsinghua University management professor Patrick Chovanec blogged on 12 August. “A whole parade of official sources have issued statements over the past few weeks predicting, with the unruffled, enigmatic certainty one normally associates with a blackjack dealer dealing a fixed deck, that inflation will come in right at three per cent this year.”

(Authored by Dexter Roberts, with assistance from Miao Han, Li Yanping, Penny Peng, Vincent Ni and Helen Sun) 

It is my view that the internet has had a significant deflationary impact on the price of many goods and services the world over as access to the net has seen a new paradigm of price transparency but this gap has been filled in.

Companies like EBay, Amazon.com, Expedia, ASOS in the UK (which coincidentally saw its share price rocket over 11 per cent on Friday night in UK trading following reports it may be a takeover target from Amazon), Tesco or Marks & Spencer have built up market values in the billions and made their founders and believers very wealthy indeed.

Locally, companies like Wotif.com, Webjet, Realetsate.com, Carsales and Seek.com (to name a few) have seen their business models take market share from the traditional players in these markets and usher in continued downward pressure on prices and margins. Their balance sheets are clean and they have no excess baggage or hangovers from the financial engineering of the past few years.

Set your portfolio to inflation-related stocks, not deflationary.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.