By Yi Xianrong (China Daily)
Updated: 2007-08-10 13:22

The author Yi Xianrong is a researcher with the Institute of Finance and Banking at the Chinese Academy of Social Sciences

Recent figures released by the National Bureau of Statistics show the country's consumer price index (CPI) rose 3.2 percent in the first half of the year, and increased 4.4 percent in June.

Hikes to food prices largely powered the bulging CPI, while prices of manufactured goods and services remained stable.

In view of this, no overall price rises are expected if everything is handled properly. However, if the food price increases fail to be brought under control and are compounded by quickly rising real estate prices, the CPI could go up sharply.

Some, following the lines of developed nations' practice, argue that the CPI is staying basically stable, judging from the core CPI, which excludes food and energy costs.

Related readings:  Analysts say CPI may hit 5 percent  Economists: 4% CPI rise still healthy  Central bank warns of inflation risks  Asset prices may keep rising in 2nd half  Lending in decline on tightened control  Central bank vows to prevent overheating

People of this school of thought ignore the fact that there is a wide gap between the Chinese CPI system and that of developed market economies. It has no real meaning that they gauge the Chinese reality with experiences gained in the developed world.

The Chinese CPI consists of eight primary components covering food, clothing, home facilities and services, healthcare, transportation, communications, entertainment and education, as well as housing.

The weight of food accounts for 34 percent of the CPI, while entertainment, education and stationary account for 14 percent, housing 13 percent, transportation and communications 10 percent, healthcare 10 percent, clothing 9 percent, home facilities and their maintenance 6 percent and wine, cigarettes and daily-use articles 4 percent.

The US CPI system, however, is weighted differently. Housing, for example, accounts for 42.1 percent, food and drinks 15.4 per cent, transportation 16.9 percent, medicare 6.1 percent, clothing 4 percent, entertainment 5.8 percent, education 5.9 percent and other commodities and services 3.8 percent.

Apart from the different weight of CPI components, the definition and revision of the weights of commodities and services in the Chinese CPI are not conducted in a transparent way. In contrast, the weights of commodities and services in the US CPI, are defined on the basis of surveys on the spending of millions of households over the last couple of years. Moreover, these weights are revised every other year so that they keep up with changes in consumer tastes and preferences.

In China, the system of drawing up the CPI was introduced as early as the 1950s during the planned-economy era. As a result, the data and experience gained during this period are largely disconnected from those gained after the late 1970s when the country embarked on the road of reform and opening up.

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