Yuan appreciation unlikely to fuel substantial inflation

Overall consumer prices in the city, as measured by the composite consumer price index (CPI), rose 2.0 percent in March over the same month a year earlier, an increase slightly larger than the 1.9 percent rise in the first two months of the year, the government said Thursday.

The faster pace of inflation in March was mainly due to higher utility costs as households had used up the full amount of a one-off electricity charge subsidy doled out by the government, the Census and Statistics Department said.

Netting out the effects of all one-off relief measures by the government, including the electricity charge subsidy, the year-on-year rate of increase in the composite CPI, i.e., the underlying inflation rate, in March was 0.8 percent, the same as the average rate of increase in January and February.

"Overall inflationary pressure on consumer prices remained modest, with the underlying consumer price inflation in March being broadly the same as that in January and February combined," a government spokesman said Thursday.

However, the government warns residents against rising inflationary pressure in the months to come.

"The economic recovery has been gaining momentum. Against this background, inflationary pressure will probably increase somewhat going forward," the government spokesman said.

"Nevertheless, the continuous expansion in production capacity should help to provide some relief by alleviating the pressure on business costs," he added.

Economists also see rising inflationary pressure, particularly in the second half of the year as faster recovery in the economy will boost consumer confidence as well as prices.

"Inflationary pressure will likely strengthen in the second half when the unemployment rate is expected to decline to a lower level - say, at around 4 percent or lower, which is low enough to encourage consumption," Paul Tang, chief economist at Bank of East Asia, told China Daily.

The city's jobless rate fell to a 15-month low of 4.4 percent in the three months ended March, down from 4.6 percent in the three months ended February, the government said Monday.

"Anticipated rises in rents in the second half will also boost inflationary pressure," he added.

However, he plays down the impact of a likely dearer Renminbi on consumer prices, despite the fact that the city sources 22 percent of all food imports from the mainland.

"Yuan appreciation will cause only mild inflationary pressure," Tang said, noting that the potential rise in the yuan's value will only be gradual.

Another economist, Irina Fan of Hang Seng Bank, also sees some increasing inflationary pressure toward the year's end.

"Inflation will trend upward for the whole year as the impact of government relief measures fades," she told China Daily.

Bank of East Asia's Tang forecasts a 3 percent rise in the headline CPI for the whole year while Fan expects a 2.2 percent increase, subject to possible adjustment.

China Daily

(HK Edition 04/23/2010 page3)