Are Chinese Growth and Inflation Too Smooth? Evidence from Engel Curves

Abstract

China has experienced remarkably stable growth and inflation in recent years according to official statistics. We construct alternative estimates using detailed information on Chinese household purchasing patterns. As households become richer, a smaller fraction of total expenditures are spent on necessities such as grain and a larger fraction on luxuries such as eating out. We use systematic discrepancies between cross-sectional and time-series Engel curves to construct alternative estimates of Chinese growth and inflation. Our estimates suggest that official statistics present a smoothed version of reality. Official inflation rose in the 2000's, but our estimates indicate that true inflation was still higher and consumption growth was overstated over this period. In contrast, inflation was overstated and growth understated during the low-inflation 1990's. Similar patterns emerge from the data whether we base our estimates on major categories such as food or clothing as a fraction of total expenditures or subcategories such as grain as a fraction of food expenditures or garments as a fraction of clothing expenditures.