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Watch a second round of price hikes

(China Daily)
Updated: 2008-06-13 10:27

The drop in consumer inflation in China last month looks particularly reassuring at a moment when more and more countries around the world face the challenge to fight rising inflation head-on. If China succeeds in combating inflation, it will considerably boost other central banks' confidence to address inflationary pressures.

Figures from the National Bureau of Statistics showed that the country's consumer price index (CPI) grew 7.7 percent last month over a year earlier, 0.8 percentage points lower than that in April.

Such a moderation in consumer price inflation will bring relief to the authorities who have been working hard to prevent both economic overheating and high inflation.

However, Chinese policymakers still have no time to breathe easy because of the acceleration of factory-gate inflation, which may signal a second round of general price hikes.

Consumer inflation went down in May largely because growth of food prices, the main driver of inflation, has slowed from 22.1 percent in April to 19.9 percent last month. It is an encouraging sign that agricultural supplies are recovering from the effect of the severe blizzards early this year.

It is hoped that the consumer inflation will continue the downward trend in the coming months. But a spike in the wholesale inflation last month suggested the fight against inflation will remain an arduous task.

Producer prices rose 8.2 percent in May, the biggest increase in more than three years, indicating that soaring raw materials and other costs could yet leak into consumer prices later in the year.

Worse, the country's oil and energy prices, capped by the government, have yet to rise to reflect surges in global oil and coal prices, which could be a new source of inflation if the government raises those prices.

Besides, reconstruction work after the May 12 earthquake in Sichuan province will increase demands for cement, steel, copper, aluminum and other construction materials, adding pressure for more price increases.

Under such circumstances, to lower inflation without derailing economic growth, policymakers should continue to tighten macroeconomic control. That means not just keeping in place a tight monetary policy. While expanding fiscal support to facilitate after-quake reconstruction, they should also cut other government expenditures to avoid increasing the aggregate demand.