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The worst isn't over yet for prices

By Hong Liang (China Daily)
Updated: 2008-08-19 14:47

Oil prices have tumbled from the peak in the past several weeks. So have the prices of a wide range of commodities, including copper, steel and aluminum. What's more, food prices have begun to ease, leading many consumers to ask if the inflation cycle is coming to an end.

Not so fast, according to some economists. They contend that the rise in the prices of energy and food, for which the demand is the least elastic, signifies only the first stage of the inflationary cycle. The next stage would see a surge in the prices of a wide range of manufactured products and services.

In China, the persistent increase in the production price is sending a troubling message that all is not well on the inflation front. Some major consumer product manufacturers and vendors, including Proctor & Gamble and Unilever of the US, have raised the prices of some of their products in the China market. Many other vendors, whose profit margins have already been stretched thin by rising costs of raw material, logistics and labor, are widely expected to follow suit.

Wages in the service sector have already been rising at double-digit rates in the past several years. If you care to look, many service providers have already raised their prices, sometimes in roundabout ways that are not immediately noticeable to the less austere patrons.

A bowl of noodle at the eatery near my office in Beijing that used to cost 4 yuan ($0.58) a year ago was 7 yuan last month before it moved. A colleague who dined there regularly said that she discovered the noodle had lost its firmness, indicating that the owner was skimping on flour used in making it.

In Shanghai, the portion of food served in the restaurant we ate lunch at regularly had noticeably shrunken in size. The laundry shop around the corner from where I used to live had raised the price of washing a bedding set from 30 yuan to 50 yuan.

Coca Cola has raised its prices, and so has Starbuck's. A 25-yuan cup of coffee may not seem much to the bankers and stockbrokers in Lujiazui in Pudong, but think about it, that same cup of coffee was only 21 yuan six months ago.

Anyone who has lived through the previous round of inflation should know that prices at the retail level tend to remain stubbornly high long after the easing of the inflation pressure. Although the consumer price index in China has been increasing at a slower rate than before, inflation pressure, arising from rising production costs, has remained a concern to economic planners.

Notwithstanding the sharp plunge in oil prices in recent weeks, this is definitely not the right time to initiate any program to dismantle the price control mechanism as has been urged by many economists in academia and private businesses.

These distinguished commentators contend that price control in the energy and agricultural sectors is indirectly encouraging inefficient use of energy by businesses and consumers, and denying farmers the chance of improving their living standards by taking advantage of an increase in market demand for agricultural produce. They said that price subsidies, which tend to have a lopsided effect of benefiting the city dwellers, are unfair to growers.

To be sure, price control, in any form, is antithesis to the free market principle. But the dismantling of the price control mechanism, which has been an integral part of the Chinese economy for so long, must proceed with the greatest caution. It must be done in steps in conjunction with other measures that would ensure transparency and efficiency in the marketplace.

It is tempting for many economists to grab public attention by identifying this or that to be the most opportune time to lift the control on the prices of energy and foods. But they should know that a destabilized market clouded by nagging inflationary pressure does not provide a favorable social and economic backdrop for a major surgery on a system that touches on the lives of so many people.