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Falling inflation

(China Daily)
Updated: 2008-09-11 07:49

China's consumer inflation fell more steeply than expected in August, signaling that the worst of the food-driven price pressures of the past year may be over now.

Yet, with producer price index (PPI) remaining high, policymakers should not hurry to pump up the economy even if growth has slowed somewhat.

Latest statistics showed that the country's consumer price index (CPI), to the surprise of all, dropped from 6.3 percent in July to a 14-month low of 4.9 per cent last month.

The new monthly figure is very close to the government's annual inflation target of 4.8 percent, indicating that the country has managed to avoid runaway price gains. Just six months ago, consumer inflation stood at 8.7 percent, the highest in 12 years.

The big drop in consumer inflation was partly due to a high base of comparison in August 2007. But food bills have also trended lower this year. The country's pig stocks have been rebuilt to lower pork prices, and a bountiful summer harvest has kept a lid on grain prices.

The cost of food, which makes up a third of China's consumer price basket, rose only 10.3 percent in the year to August, down sharply from 14.4 percent in July.

However, while a sharp year-on-year deceleration in food prices has largely cooled consumer inflation, the country's PPI inflation rose to a 12-year high of 10.1 percent in August.

Some people expected that the combination of weakening investment activities and falling crude oil and food prices should have reduced inflation pressure on the producer price index.

But factory-gate prices surprised on the upside, rising further after a 10.0 percent increase in the 12 months to July.

Since non-food inflation remained rock-steady at 2.1 percent, the current rise of PPI means that domestic manufacturers are unable to pass on high producer prices to customers and are having to compress profit margins instead. The difficulties of manufacturers have been made a case for relaxing macroeconomic control.

With inflation trending toward a soft landing, it looks likely that inflation expectations will start to decline soon, lowering the risk of broadening inflation and an inflationary spiral.

Besides, with global commodity prices slowing, China's PPI inflation may also moderate over time. It is thus possible that the current phase of acceleration in PPI inflation will not necessarily generate a spike in CPI inflation.

Nevertheless, given the spike in recent PPI followed the hikes in domestic oil-product and other energy prices in June and July, it is still premature to take extra stimulus to boost economic growth.

International oil prices may continue to fall due to the global slowdown. But it makes little sense to expect a return to the era of cheap oil. Global supply of oil will remain stretched before China can significantly raise its energy efficiency.

The current deceleration of consumer inflation actually provides a good window of opportunity for the government to further remove energy price control measures. Therefore, no one should make the temporary fall of energy prices an excuse to slow the country's pace of energy conservation.

(China Daily 09/11/2008 page8)