Inflation does matter in China and the world

By Huang Shuo (chinadaily.com.cn)
Updated: 2010-11-15 16:58
Large Medium Small

The growth rate of China's consumer price index (CPI) was 4.4 percent year-on-year in October, a 25-month high. The rate is up 0.8 percentage points from September. This is an alarming statistic for a country that for the past three decades has had steady economic growth. Inflation risks do matter for China.

In particular, the new factor of a rise in prices, main promoter for CPI growth, took up 3 percentage points of the 4.4 percent surge. Prices of agricultural products and food have been playing major roles in contributing to the CPI hike. Food prices surged by 10.1 percent compared with the same period of last year as a result of the price hike in international agricultural products, and the recent flood in South China’s Hainan province affected vegetable prices and oil prices, adding to the product costs, said Sheng Laiyun, spokesman for the National Bureau of Statistics (NBS).

In addition, daily essentials such as eggs and vegetables are leading the price increases in China's consumer market, followed by meat, oil and white sugar.

As the industry generally expected that about 4 percent would be the proper answer for CPI, the final data released by the NBS on Nov 11, 2010, was 0.4 percentage points higher than estimated, which astonished the public and drew lots of attention from domestic and foreign experts.

Consumer prices associated with social stability are the top concern of the public in China. The increase of CPI indicates that the surge in commodities prices is ongoing in the consumption market, closely linked with the daily lives of ordinary people. China’s income per capita still lags behind the United States, the European Union, and even some other emerging economies. How to increase income and stabilize or lower the prices in the market, especially for daily essentials, should be attached great importance by the government.

Livelihood is like the basis for constructing a building, which lays the firm foundation for a harmonious society. Whether people can lead a good life decides the quality of governance by central and local authorities. High consumer prices pose an unstable economic factor to improving the living standard of people.

More regulations are expected for the soaring Chinese CPI. As to that situation, the People’s Bank of China, the central bank of China, has noticed and adopted a measure increasing the required reserve ratio by 50 basis points and coming into effect on Nov 16, 2010, in order to ease the pressure from the second round of quantitative easing policy (QE2) by the Federal Reserve of the US and increasing liquidity caused commodity prices to rise in China. But is it enough to merely depend on national economic regulatory authorities?

Every economy released loose monetary policies to conquer the challenges brought by the international financial crisis in 2008 and get out of the recession. But side effects are inevitable. Rising inflation is one of the consequences. As a result, countries with expansion policies on issuing more currencies should work together and reach agreements to confront the emerging side effect -- inflation.

The author can be reached at larryhuangshuo@gmail.com.