Inflation a real threat for less privileged
By Wang Lan (China Daily)Updated: 2007-06-28 17:11 While economists say raising the interest rate could help lower aggregate demand in the long run, they doubt if the traditional monetary policies of tightening liquidity can have much of an impact on the food-price driven inflation.
The CPI rise is widely seen as temporary and purely domestic in nature because food prices are by far the largest driver of price index in China, according to Jonathan Anderson, UBS Securities' chief economist for Asia. The expert with one of the largest financial institutions in the world says: "We don't see inflation as a serious issue for China today. Core inflation is still around 1 percent, and we haven't seen signs of acceleration so far."
Statistics show that against the small increase of 1 percent in the cost of non-food products in May, food prices jumped 8.3 percent, with egg prices rising the most (37.1 percent), followed by meat and poultry products (26.5 percent), edible oil (21.4 percent) and grains (5.9 percent). The other components of the CPI, however, showed only a small rise or even dropped. For example, prices of household appliances rose 2.2 percent, while transport and communication charges were down 0.5 percent and the cost of entertainment, educational materials and services fell 1.2 percent.
"Although the CPI rate has remained modest, we are worried because the demand for food is inelastic," says Renminbi University professor Li Yongsen. But the CPI increase, triggered largely of rising food prices, won't have as great an impact on the people as it did a few years ago.
In the "poorest areas of China, rising food prices really create a burden on people". The general living standard in the country, however, has improved, and the quality of life is no longer measured by the amount spent on food. "More and more factors should be taken into account."
Experts advise a cautious approach to the interest rate. "Theoritically, the interest rate should not be changed very often to ensure economic stability," Li says.
Economists and analysts are worried over the impact of interest rate hikes on inflation. "Even if the central bank raises the interest rate further, it will take some time before it bears the desired results." Haifu Futures Co analyst Li Jingyuan says.
An increase in interest rate does not necessarily serve all the purposes, the experts say, especially because it gives rise to other financial problems. "Raising the interest rate is likely to increase the capital cost of the entire society and put pressure on those doing business in China," says Li Yongsen.
"More macro-economic controls are likely to be imposed in the near future to bring down the excessive liquidity in China's capital market," according to an economist with Chinese Academy of Social Sciences.
The country's CPI is widely expected to take a steady but mild upward curve in the long term, instead of rising sharply within a short period. Hence, too much worry over the mildly rising CPI is unwarranted, he says, because it's likely to subside after an adjustment in the food market is complete.
The less privileged will be hoping that to happen sooner than later.
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