Inflation target

(China Daily)
Updated: 2010-12-16 08:02
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A modestly higher inflation target for next year highlighted the authorities' determination and its confidence that it will stop consumer prices from rising through the roof.

But growing public anxieties about accelerating inflation indicate that the country's current tightening measures are far from sufficient to calm inflationary expectations, which, left unchecked, may even be more harmful than actual price gains.

It was reported that the National Development and Reform Commission revealed that the official inflation target will be raised from 3 percent this year to about 4 percent next year.

Such a moderate increase in the expected inflation level represents both official recognition of the present inflation pressures and a strong commitment by the government to contain future price hikes.

China's consumer price index, the major gauge of inflation, jumped to a 28-month high of 5.1 percent in November. Even if inflation can be expected to moderate somewhat from the current high levels as food prices ease gradually, few expect low inflation to return anytime soon.

A recent survey by China's central bank found that the proportion of Chinese citizens satisfied with price levels has sunk to an 11-year low in the fourth quarter of this year despite the government's efforts to rein in prices.

Clearly, the cautious consumer sentiment shows that residents are not optimistic about future adjustments in price levels, which helps neither consumption expansion nor the war against inflation.

Worse, the present level of dissatisfaction with price levels is even higher than that in the last round of inflation which peaked at 5.8 percent for the whole year of 2008.

Policymakers must pay close attention to the reasons why consumer sentiment has deteriorated so much while inflation for the whole year is just above the official target of 3 percent for the year.

One possible explanation may be the widening income disparities in this country. Since inflation usually disproportionately hurts the poor, a yawning income gap between the few rich and numerous middle and low-income families will only exacerbate the difficulties of the less well-off in dealing with a new round of inflation.

The around 4-percent inflation target for next year may look fine if the Chinese economy can manage to grow by about 8 percent. Yet, Chinese policymakers should not put such a statistical result above the feeling of the overwhelming majority of the people.

To effectively prevent a self-reinforcing process of price rises feeding household and company inflation perceptions, they should also take into account the public's diminishing tolerance when setting and pursuing next year's inflation target.