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CPI rise probably won't signal serious inflation

By Shi Weigan (China Daily)
Updated: 2007-06-15 08:27

The author Shi Weigan holds a PhD in economics from the Chinese Academy of Social Sciences

Theconsumer price index(CPI) for May released on Tuesday did not come as a surprise. The 3.4 percent monthly rise, though a record high for the past two years, was within market expectations.

CPI growth over 3 percent is usually regarded as a signal of inflation and of possible economic over-heating. Many institutions speculated that the central bank is considering raising the interest rate.

Raising the interest rate following record CPI growth is a logical choice according to most economic theories. However, a close look into the CPI growth as well as the macro economy is necessary before the authorities make any move on the interest rate.

According to analysis of the National Bureau of Statistics, the CPI jump in May was due to the rise in food prices, especially meat and eggs.

The data for calculating the CPI can be divided into food and non-food commodities. Food prices account for 33.2 percent of the CPI and the prices of non-food commodities account for 66.8 percent.

Among the seven categories of foods, meat and poultry products account for 8 percent; eggs, 1 percent; and grain, 3 percent.

Meat and egg prices have nearly three times the CPI weight of grain prices.

According to statistics from the Ministry of Agriculture, pork prices rose by more than 100 percent over July 2006 and were 70 percent higher than this past March. A natural consequence is the CPI increase.

China has been a manufacturing base for the world for quite some time, so it has seen a balanced supply and demand for most commodities in recent years. The supply of several commodities even surpasses the demand. As a result, the prices of non-food commodities, except for housing, remain flat.

The CPI is actually propelled by the price rise in meat and eggs. It is necessary to examine whether the price rise will trigger real inflation, which must be cushioned with a higher interest rate.

If the price of pork and eggs rises too high, the common people will probably turn to other foods.

The higher price for pork and eggs will only have a mild influence on the economy other than pushing up the price of animal feed and related products. It is different from the case in which grain prices rocket because pork and eggs are not used as widely as grain in industrial production.

The CPI growth of over 3 percent in May will not put long-term pressure on economic growth.

Judging from the current situation, we can conclude that the recent CPI growth is unlikely to lead to comprehensive inflation.

The investment growth in industry is the major source for inflationary pressure in China, especially the investment in manufacturing iron, steel and nonferrous metals.

The higher-than-normal growth rate of investment in these industrial sectors was not checked until the central government issued several policies against the production and export of energy-intensive and resource-intensive products and products with high emission pollutants.