BEIJING - The Chinese government is working to make life less torrid for the country's low-income families, who are most vulnerable to price hikes, by giving them subsidies to off-set price hikes.

China will "improve the system of subsidies and institute a sound mechanism to raise social assistance and social security benefits when commodity prices rise," Premier Wen Jiabao said, when delivering the government work report Saturday.

"We cannot allow price rises to affect the normal lives of low-income people," he vowed.

Low income people are sensitive to price fluctuations because they rely heavily on subsidies, which are defined by the basic price level of consumer goods and services,

China's consumer price index (CPI), a major gauge of inflation, has increased continuously since June last year, when a 2.9-percent year-on-year rise was registered.

The index hit a 28-month high of 5.1 percent in November and stood at 4.9 percent in January this year.

The price hikes have mainly been driven by surging food prices.

On Wednesday, the National Development and Reform Commission ordered local authorities to establish, by the end of this year, a mechanism to peg subsidies for low-income families to the price of daily necessities.

Wen said the government aims to keep consumer price increases at around 4 percent this year. He said stabilizing prices will be a top priority, pledging that the government will do more to contain rising prices of food, housing and other essentials. The problem "affects social stability," he warned.

"CPI measures the general situation of the country's macro economy but does not reflect the impact of actual price changes upon low-income families," said Zhang Weiguo, an economist with the Shandong Academy of Social Sciences.

Meanwhile, living standards differ among regions, he said. "Therefore, it is necessary for each local government to design an index tailored for low-income earners in line with the living standards in the region.

Some local governments have already set about formulating such gauges. Subsidies will be provided to them if price increases go above a certain level.

Shandong province launched its index in 2008 which covers 8 categories of products and services, including food, cigarettes and alcohol, clothing and household items and maintenance, according to the local statistics authority.

So far, the government has handed out subsidies worth more than 200 million yuan ($30.47 million), according to the local price department.

Other provinces, such as Fujian, Sichuan and Henan, will also start their own index soon.

"Launching the index is an active attempt by the government to adjust income distribution in order to achieve equality," said Jin Lanying of a neighborhood committee in Tai'an city of Shandong.

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In other efforts to lift the country's standard of living, the central government has set a target to increase the incomes of urban and rural residents by an annual average of more than 7 percent in real terms, according to the draft of the new five-year plan.

The government will "strive to coordinate increases in people's incomes with economic development and increases in workers' pay with improvements in labor productivity," Wen said.

He also pledged that the government will create 45 million urban jobs over the next five years and "reduce the number of people living in poverty."

The government will further work to increase incomes, raise minimum wages and basic pensions and hike the individual income tax threshold to aid wage-earners.

According to the United Nations' standard of one dollar per person each day, China still has 150 million people under the poverty line.

Wen pledged Sunday that China aims to "basically eradicate poverty" by 2020 while greatly raise it poverty line from the current 1,196 yuan per year (50 cents).

Analysts said the moves will narrow income gaps and increase people's wealth. Higher income for wage earners, including low-income families, will help stimulate the country's domestic consumption and push forward economic restructuring, they said.