China's inflation likely to cool off

By Xin Zhiming (China Daily)
Updated: 2008-08-15 07:41

China's consumer inflation has maintained its downhill journey in July, easing to 6.3 percent year-on-year from 7.1 percent in June.

While this shows the inflation-fighting measures are working well, the country needs to seek fundamental solutions to this problem, said analysts.

A higher base should be an important factor for the lower inflation figure last month, analysts said, as prices began to rise rapidly in the second half of last year.

"The government's measures in stabilizing food prices are crucial," said Sun Lijian, economist with the Fudan University in Shanghai.

Food prices have shown a significant decelerating trend, increasing only 14.4 percent year-on-year, 2.9 percentage points down from June.

The government has increased subsidies to farmers to make up for the rising fertilizer and seed prices. As a result, while major grain prices in the international market were soaring, domestic prices remained stable, analysts said.

The consumer price index should slow further over the rest of the year, as more increases in food supply are likely to ease the shortages since the second half of last year that were caused by animal diseases and natural disasters, said Stephen Green, head of research at the Standard Chartered Bank (China).

People are widely expecting another round of energy price rises before the year-end. But the high base effect will likely see inflation continue to fall to below 6 percent in the fourth quarter, analysts said.

There are also concerns about the strong rise in producer price index (PPI),which could gradually spill over into the consumer inflation zone.

China's PPI rose by a 12-year peak of 10.1 percent in July, but Green said it could impact the core CPI, which excludes the highly volatile food and energy prices, instead of overall inflation.

"Given the falling commodity prices, we may have now seen the peak of PPI," Sun Mingchun from Lehman Brothers said.

The price stabilization measures, however, should not work in the long run, analysts said.

The current round of rising inflation in essence can be attributed to the liquidity boom caused by China's economic structure that favors exports and investment, said Sun from Fudan University.

China's exports have helped the country accumulate a huge trade surplus and foreign exchange reserves, which in turn pressure the yuan to appreciate, he said. The rising yuan would lead to more inflows of foreign speculative capital, stoking more inflation.

"China must develop a domestic demand-driven economy," said Sun.