Tightening policies to remain as inflation persists

Updated: 2011-03-03 07:48

(HK Edition)

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Tightening policies to remain as inflation persists

Inflation is a key issue and a top concern for the central government this year. The latest statistics on the consumer price index (CPI) may have helped ease anxiety, but the problem is far from over. We may not see any sustainable downward trend for inflation before the third quarter and thus tightening measures are likely to go on for a while.

China's CPI rose 4.9 percent year-on-year (all on a year-on-year basis unless otherwise specified) in January, after rising 4.6 percent in December, according to the National Bureau of Statistics (NBS).

The CPI growth was somewhat lower than market expectations, which was mainly due to a slowdown in the month-on-month (MoM) increase of non-food prices as well as the lower-than-expected rise in some food prices. Due to the supply shortage and demand spike, most food prices generally see substantial MoM increases during the lunar new year holidays.

In fact, the NBS has adjusted the weighting of various items that make up the CPI, but its actual impact on the moving trend of the index seems quite limited. According to the NBS announcement last month, the weighting of food has been lowered by 2.21 percentage points (ppts) to 30.6 percent while the relative importance of residential items has been raised by 4.22 ppts to about 18.9 percent.

All other items have also been adjusted according to the change in the household consumption structure. However, the impact of this adjustment will be limited in the short term. One reason is that the adjustment was quite small, similar to what the NBS has done in previous years. Another reason is that due to the probable continuation of market-based reforms for public utility prices and the increase in mortgage interest payments, household item prices are likely to maintain relatively faster growth than most other non-food items - at least in the short-term. Based on our calculations, the accumulated effect of the weight adjustment on full-year CPI growth is about 0.1-0.15 ppt.

During the month of January, food prices increased 10.3 percent after climbing 9.6 percent in December and 11.7 percent in November 2010. Non-food prices picked up 2.6 percent, while service prices jumped 4.6 percent, up from increases of 2.1 percent and 2.8 percent in December. Most labor-intensive service items showed marked increases, reflecting the significant upward pressure in labor costs amid the inflation expectations.

In January, household service prices jumped 11.4 percent after rising 10.1 percent in December. Residential items picked up 6.8 percent, supported by rising rent levels and higher mortgage payments for homeowners.

On the other hand, the ex-factory price index and the producer purchasing price index (PPI) saw growth rebound from 5.9 percent and 9.5 percent this past December to 6.6 percent and 9.7 percent in January amidst rising coal, steel and other commodity prices.

Looking forward, food prices may continue to move up in February, fuelled by the lunar new year effect and the ongoing drought in northern China. Meanwhile, service prices are quite likely to continue with their strong upswing supported by rising labor costs. Headline CPI is expected to stay above the 4.5 percent mark in February and may even climb further to above 5 percent in March. The reading is expected to peak in the early part of the third quarter at around 5.5 percent and then tailing off slightly after that. For the ex-factory price index, year-on-year growth should stay above 5 percent in most months due to the high tail-raising effect and continuing increases in global commodity prices.

The author is executive director of BOCI Research Limited. The opinions expressed here are entirely his own and do not represent BOCI or any other affiliated companies within the group. Nothing in this article constitutes an investment recommendation.

(HK Edition 03/03/2011 page2)