Inflation risks

Low-income families are feeling chilly not only because the coldest winter in about 30 years, but also because of China's resurging consumer inflation.

For policymakers, however, it is still too early to predict another high inflation cycle is coming.

The country's Consumer Price Index rose to a seven-month high of 2.5 percent in December, thanks to strong food price rises.

The market has been divided over the inflation prospects this year.

For those that highlight the moderate 2.6 percent growth of the CPI for the whole year, which was much lower than the official target of 4 percent and the 5.4 percent growth of the previous year, inflation will be no problem for the recovering economy.

For them, food prices, which contributed 1.4 percentage points of the 2.5 percent CPI in December, are behind this round of rising consumer inflation and, as the winter passes, things will return to normal.

If this forecast turns out to be the real scenario, it will help the Chinese economy greatly, since any monetary tightening as a result of surging inflation would undermine its much-needed recovery.

But it would be dangerous for policymakers to be so optimistic, because the possibility of inflation unexpectedly surging remains.

High inflation can catch people off guard, as the formidable inflation in 2008 shows. For another, the undercurrent of expanding credit and precarious pork prices add to the potential danger of inflation spikes in the coming months.

Although yuan lending did not pick up significantly in 2012, new credit has been rapidly rising through channels such as trusts, bonds, bills and off-balance-sheet wealth management products. Economists have called on policymakers to pay attention to this, although the traditional indicators of new yuan loans and M2 (broad measurement of money supply) remain at normal levels.

Pork prices may also add to inflation worries sometime this year. They fell by 3.5 percent in 2012, but history shows once they begin to bottom out, their high weighting (about 3 percent) in the CPI basket may trigger the price rises of other food items, ultimately pushing up overall food prices and the CPI.

In the international markets, the de facto loosening of monetary policies by policymakers in the United States and the European Union may add fuel to the domestic fire of inflation.

It is advisable for policymakers to closely monitor the situation and make plans for the worst-case scenario.

(China Daily 01/14/2013 page8)