BIZCHINA> Review & Analysis
Price battle half-won
(China Daily)
Updated: 2008-05-13 10:23

It is far too early to claim victory in our battle against rising inflation, though the statistics bureau released the 8.5 percent consumer price index (CPI), the main measurement of inflation, for April yesterday.

With inflation remaining high - 0.2 percentage point higher than in March , policymakers are sure to feel substantial pressure as the situation has proved to be more complicated than expected.

The sign of lingering high inflation has become obvious as the producer price index, released last week, rose to 8.1 percent from 8 percent in March, pointing to increasing pressure from industrial sectors on overall prices.

In month-on-month terms, the April inflation rose by 0.1 percent, as against a 0.7 percent drop in March. The situation remains very challenging, therefore demanding continuation of tight economic policies - at least for now.

Early last year, people had serious anxieties about the inflation and hoped that it would ease as the supply of meat increased (rising pork prices were a major contributor to inflation at that time). The inclement weather early this year has pushed the first-quarter inflation to as high as 8 percent, but many think that once the weather factor disappears, things will get better.

Now it proves to be worse than what many had anticipated. The food-led inflation continues to have a sustained pressure on overall prices - it rose to 22.1 percent year on year from 21.4 percent in March; moreover, oil, fuel, and other basic goods may become a new driving force for inflation in the coming months.

The supply shortages in meat may ease significantly in the second half, but the recent surges in global grain prices add to the risk that domestic grain prices may continue to rise.

The country has been mulling fuel and resource price reforms, bringing prices of those products more in line with market demand. If the reform agenda is carried out, it will add to inflationary pressure.

What we can do is continue with the tight economic policies. They have worked as the central bank's credit tightening has forced developers to offer discounts to accelerate sales, which helped in the moderate rise in housing cost component - the second largest contributor to CPI - from 7.0 percent year on year in March to 6.8 percent in April.

The tightening strategy should not change unless significant signs of economic slowdown surface due to a decreasing foreign demand following a downtrend in the world economy.

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