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No fear of irreversible inflation

By Liu Shinan (China Daily)
Updated: 2011-01-24 13:32

Two years ago, the central government decided on a macro-control policy of “keeping economic growth” to minimize the impact of the global fi nancial crisis and reverse the feared decline of the country’s economic growth. But that policy changed at the Central Economic Work Conference in December, when the government decided to accord priority to stabilizing the general level of prices. 

The country’s consumer price index (CPI) has been rising over the past year, from a year-on-year increase of 1.5 percent in January last year to 5.1 percent in November. The price rise has become a sensitive issue, touching the nerves of ordinary people and evoking strong reaction from the public.

What people have felt most directly is not the 4 to 5 percent CPI growth rate but the 10 percent, and in some cases as high as the 20 percent, increase in prices of necessities such as grains, edible oil, vegetables, eggs and fruits. Ordinary people also fear that their hard-earned savings — meant for medical care, education, housing, and pension and unemployment allowance — will evaporate rapidly if prices keep rising and the currency keeps devaluating.

These concerns, if not eased, will seriously aff ect social stability and erode public confi dence in the administration. Since the price rise remains a big issue and is directly related to people’s livelihood, healthy development of the national economy, and social harmony and stability, the government should not underestimate it.

The increase in the costs of labor, materials, transportation, and land and housing, as well as growing environmental costs are the major factors that have led to the latest round of price hikes. The insuffi cient supply of some agricultural products because of widespread natural disasters across the country over the past year, too, has fuelled price rise. The oversupply of credit over the past two years has added further pressure on the economy and caused inflation to rise.

To stave off the impact of the global fi nancial crisis, curb the decline of the country’s economy and promote steady economic growth, the government has pumped an astronomical amount of liquidity into the market. But the side eff ects of the massive stimulation input are yet to fully emerge. Some external factors, such as fl ooding of global liquidity, infl ow of overseas hot money, devaluation of the US dollar, high-perching prices of some international bulk commodities and frequent natural disasters have aggravated the shortage of global agricultural supplies, pushing up domestic prices.

Besides, hoarding and speculation by some traders, along with lax market monitoring and supervisory mechanism, have also added to people’s worries and increased their fears over further infl ation.

The government has to attach greater importance to price rise and take emergency and eff ective measures to curb infl ation. Considering that the latest round of domestic price rise has been partly induced by some increasing costs and that the harm it causes will extend into the future, the government should combine short-term emergency measures with a long-term and eff ective price control mechanism to rein in infl ation.

To ease the shortage of supply, the government should boost the agricultural sector and protect farmers’ initiatives and interests. It should take eff ective measures to guarantee the supply of major agricultural products and farming materials, perfect the country’s reserve system and lower the transportation and circulation costs of some necessary farm products to a reasonable level.

The government has to try and manage liquidity, too, to prevent the creation of monetary conditions that could lead to further increase in prices. And because of the looming risk of imported infl ation, it should keep close track of overseas hot money and prevent them from flowing into the country on a large scale. Besides, the government also has to better regulate import and export of some major agricultural products and bulk commodities to strengthen the State reserve regulatory capacity.

In addition, it has to take some necessary measures, such as increasing subsidies for people in diffi culty and setting up the lowest allowance system, to ensure that ordinary people lead a fairly decent life.

The media have a role to play, too. They should cover infl ation in a scientifi c manner and try to pinpoint unrealistic and unscientifi c reports to allay people’s unnecessary fears over further price rise.

The country has some positive elements to stop prices from rising further. For example, the supply of and demand for grains is now basically balanced. Seven consecutive years of bumper harvest and the surplus of many industrial products have laid a solid foundation for the country to stabilize prices.

Experience shows that price rise can be controlled if a country’s economy is not overheated and its total social demand does not infl ate by leaps and bounds. Despite its rapid economic growth over the past three decades, the good job the country has done to prevent the national economy from being overheated will help prevent the current structural price rise from evolving into irreversible inflation. 

Yhe author is deputy director of the Academic Division of Economics of the Chinese Academy of Social Sciences