Ren Xingzhou

Research Report No 108, 2004

II. An Analysis of Major Causes for CPI Fluctuation

1. The rise of grain prices was the main factor that drove up food prices and the CPI

An analysis of factors that drove up the CPI this year reveals that the major factor was the rise of food prices, which was largely caused by the rise of grain prices. Based on the calculations of the State Statistics Bureau, the rise of food prices drove the CPI up by 3.19 percentage points during the period from January to June. It accounted for 88.6% of the total CPI rise, and was the leading factor of the price increase. The significant impact of food prices on CPI fluctuation is due to the weight given to food prices in all CPI indicators in China, which currently stands at 33.6%, over 1/3 of total weights. As a result, large increases in the price of food and consumer products related to food will inevitably lead to the rise of food prices and the large increase of the overall CPI as well. Grain prices in China experienced large increases every month this year on the basis of high rise of grain prices in the fourth quarter last year. Meanwhile, prices of all consumer products related to grain (such as meat, poultry and their products) also increased by two digits.

In general, the large increase of grain prices since the second half of 2003 was caused by the imbalance of grain supply and demand in China. Years of short supply and decreases in reserve grain created a large gap between supply and demand. Total grain output fell from 1.0246 trillion Jin in 1998 to 861.2 billion Jin in 2003 (Two Chinese Jin make one kilo.), when the grain shortage reached about 100 billion Jin. The problem was mainly a result of two factors. One is the continuous decrease of farmland in the past few years, including illegal occupation of farmland, which leads to decreases of the absolute areas of farmland. The second is the continuous low grain prices in the past few years and various taxes, which seriously injured farmers’ enthusiasm to grow grain. However, although grain prices rose very fast and by a big margin, objective analysis demonstrates that it rose on the basis of many years of low prices. Therefore, it was obviously an increase with a recovery nature, and the grain prices are still below the highest level in history. On the other hand, the rise of grain prices increased farmers’ income, alleviated the problems of low income farmers, and signaled for crop restructuring, which to some extent mobilized farmers’ enthusiasm to grow grain. However, the rise of grain prices certainly affected the life of low-income groups in urban areas.

2. Expanding demand and government price adjustments are important factors that lead to the rise of prices of major service products

Along with the rise of the incomes of urban and rural residents and the fall in the Engel coefficient, people are spending more and more on cultural activities, health and recreational services, which pushed up the prices of such services. Meanwhile, the quality, grade and contents of services continued to improve, which contributed to the rise of prices to certain extent. Certainly, there are also problems of illegal charges in the areas of services and education.

There are four major categories of housing services, namely housing construction and decoration materials, housing lease, private housing, and water, electricity and fuel services. In the first half of this year, except private housing and housing construction and decoration materials that were not related to service prices, the prices of the other two categories were all increased by over 3% on monthly basis. Of which, the prices of water, electricity and gas services increased by a relatively wide margin, which were 2.8%, 3.0%, 3.2%, 4.9%, and 6.6% respectively over the same periods of the previous year. As the prices of such services are still largely controlled by local governments at present, price changes are mainly affected by government price adjustments. Therefore, further imbalance of energy supply and demand and large price increase this year have placed great pressure on local governments to adjust the prices of such services, which in turn lead to significant adjustments of prices of such services. The large increase in the prices of decoration and fitting materials is also an important factor that drove up living prices. Except January, such prices in all the months of the first half of this year increased by over 4%, indicating that price rise in energy and other important materials already affected the decoration and fitting materials and products, and thus increased living prices.

3. The current round of CPI changes is characterized by falling prices of industrial goods and transportation and communication products

In the first half of this year, prices of industrial consumer goods, such as clothing, household utensils and transportation and communication tools, continued to drop, despite falling margins. The characteristic of CPI changes since the second half of 2003 was that the large price increase of upstream products, such as energy and most raw material products, had little direct impact and transmission effect on the CPI. This is markedly different from the characteristic of price increases in the 1980s and early 1990s. Analysis shows that the specific reason was that although the price increase of upstream products created certain pressure to pull up costs, large changes had already taken place in the market environment and background of supply and demand. On the one hand, due to technology progress, product upgrades and improvements in the market mechanism and management levels, some factors that pulled up prices of industrial consumer goods, such as automobiles, communication products and household electric appliances, were absorbed in the production process. On the other hand, as such industrial consumer goods are presently facing an absolute buyers’ market and fierce market competition, it is not likely that their prices will go up. Meanwhile, some enterprises had to reduce their output and distribution profits. However, it is also necessary to note that compared with last year, the falling of prices of such industrial consumer goods has slowed down, indicating the price inflation of upstream products did have certain impact on the prices of such products.

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