China Ink

Worst inflation in a decade?

The big news this week was that food prices are soaring

Worst inflation in a decade?

Food inflation: a serious problem?

China’s consumer price index reached 4.4% in October, its highest rate in 25 months. That took inflation to the top of the government agenda, said China Securities Daily, quoting unidentified officials from the National Development and Reform Commission (NDRC) as saying that price caps on food were under consideration, as well as action against hoarding. Local mayors may even be made responsible for vegetable supply and price stability.

On a tour of a supermarket in Guangdong, Prime Minister Wen Jiabao agreed that food prices “affect the well-being of the masses, so we must pay great attention.” But the China Daily quoted an official at the Academy of Macroeconomic Research saying that inflation was “mild and bearable given the country’s fast economic growth.” The Academy is “affiliated” to the NDRC, says the newspaper. So a mixed message this week: it’s a problem, but don’t panic, we can control it.

The South China Morning Post reported on the “alarming figures” showing average wholesale prices of 18 staple vegetables to be 62% higher in the first 10 days of November than in the same period last year. It added: “The growing candour apparent in the official language reflects Beijing’s rising concern at the situation.”

The Financial Times agrees that inflation has “become the principal risk to the economy”. As well as a “possible spark for political unrest”, the FT also thought price rises could encourage speculative investment.

“Daily necessities can rarely be had cheaply nowadays,” writes the SCMP, citing the example of a 77 year-old who leaves home at 7.15am to go to a Carrefour supermarket in search of early bird bargains. When she arrives there are already about 50 others ahead of her in the queue: “All old people like myself, coming to grab cheap stuff”.

Policy responses?

As reported last week (see Talking Point), the Chinese are unhappy with the US Fed’s QE2 policy, which they fear will further exacerbate inflationary pressure. Interest rate rises look likely.

As to the immediate problem of food prices, the Ministry of Commerce has released 62,400 tonnes of pork and 210,000 tonnes of sugar from its reserves to ensure “stable supply”.

Others questioned price controls in principle. The 21CN Business Herald said they wouldn’t solve the underlying problem and were a return to the methods of the planned economy. The Beijing News saw them as the worst policy choice, and that inflation cannot be dealt with by administrative order. However, an announcement from the State Council on Wednesday stated that administrative measures would be used to tame prices, but not saying when.

According to the Wall Street Journal: “Analysts are speculating that China could resort to price controls to fight inflation, as it did during China’s last inflation fight in 2007 and 2008.”

Back then there were riots in supermarkets over vegetable oil, and the government temporarily set prices of cooking oil, milk, eggs and staple meats such as pork.

The Financial Times noted that price controls are already in place in some cities: “Fuzhou on the southeast coast announced caps last week on four types of vegetable, while Kunming in the southwest has announced price controls on vegetables.”

Expect more of the same, reckons the SCMP, with Beijing now fearing the impact of the “worst inflation in a decade”.

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