In 2006, China's consumer price index (CPI) grew 1.2, 1.4 and 1.3 percent in the first three quarters respectively, but hit 2 percent in the fourth quarter (the figure jumped most noticeably to 2.8 percent in December). The sudden increase has aroused concern considering the fact that commodity prices in China have been relatively low over the last two years.

Nothing irregular about CPI rise: average growth over last four years no higher than the average over the last 17 years

There are no irregularities in the current price trend, says Yao Jingyuan, chief economist of the National Bureau of Statistics. From 2003 to 2006, the national economy grew more than 10 percent annually. In each of those years, the CPI rose 1.2, 3.9, 1.8 and 1.5 percent respectively, an average of 2.1 percent. Since 1990, however, CPI growth has averaged 5.08 percent. That is to say, the average price growth over the last four years is lower than half the average calculated over the last 17 years.

Since the 1990s, the Chinese economy has experienced two 4-year consecutive growth periods where the growth rate has exceeded 10 percent. One was from 1993 to 1996 and inflation was relatively high at this time. The other is the last four years, during which, in contrast, inflation has kept low. Therefore, the current economic period is the best since the 1990s.

Why has a slight jump in prices caused debate and worry about inflation? This is partly because of China's experiences, Yao believes. In more than two decades of reform and opening up, China has gone through two major periods of inflation: from 1988 to 1989, during which inflation peaked at 18 percent, and from 1992 to 1994, when it hit 24 percent. In 1998, 1999 and 2002 inflation fell below zero, but it was not deflation in a strict sense and the economy was still growing. People didn't really experience the hardships of deflation but were keenly impressed by the negative effects of inflation �C the devaluation of wealth, damaged productivity and lower living standards. History has left the Chinese people more sensitive to inflation than deflation.

No need to worry, demand and supply are balanced: macro regulations contribute significantly to curbing inflation

Will inflation occur this year? There is no need to worry, says Yao. He gave a range of reasons for this.

Firstly, in terms of consumer goods, China has long been a buyer's market. All 800 products that have been recognised as being closely related to people's livelihood (and are therefore monitored by authorities) are in full or even oversupply, which means prices of these goods are unlikely to increase.

Secondly, in terms of production capacity, China has long been dependent on investment to drive the economy, which inevitably equates to a huge production capacity. Therefore, in terms of production capacity, China faces the risk of a surplus, rather than a shortage. It is unlikely China will witness a price hike as there is a healthy supply.

Thirdly, enterprises rely more on competitiveness than prices. Last year the CPI rose 1.5 percent, 0.3 percent less than the previous year, while the cost prices of industrial goods rose 3 percent, 1.9 percent less than in 2005. When prices were falling enterprises still recorded a profit growth of 30.1 percent. This means Chinese enterprises are relying on having better technology and better managing their companies for profits, rather than price hikes. Increased enterprise competitiveness will effectively curb inflation.

Fourthly, macro-regulations introduced by the central government make a significant difference to the regulation of inflation. The central bank prioritises low inflation in its monetary policy; it adjusted the deposit reserve ratio three times last year and twice this year. Such adjustments will help prevent high inflation.

Do not panic: grain price-driven CPI rise will not continue

In last December, the CPI jumped 2.8 percent against the corresponding month of the previous year and 1.4 percent over the previous month. The growth was indeed high, and was driven largely by grain prices hikes. That month, grain prices soared 6.9 percent year on year, and that of meat, poultry and related products, including eggs, rose 13.4 and 17.8 percent respectively, driving food prices up 6.3 percent and the CPI up 2.1 percent.

In 2006, China saw grain price hikes despite the third consecutive year of a bumper grain harvest. Analysts attributed this to various market elements. Firstly, global grain production was below expectation, with the main varieties falling short by more than 4 percent; secondly, petroleum price hikes led to an increase in the production of bio-fuels made from maize, bean oil and seed oil, thus increasing the demand for grain; thirdly, speculation on the futures market had a bad effect. Such production cuts and price hikes internationally surely affected the domestic market. As a result, China's grain supply was rather tight despite an overall production increase. The grain structure also needed to be improved.

Will the CPI continue to rise based on the grain price increase?

The highest annual grain harvest on record was in 1998, nearly 510 billion kilograms; and the lowest in recent times was in 2003, 430.7 billion kilograms. As a result, the CPI peaked at 3.9 percent in 2004, indicating inflation peril. However, it dropped back to 1.8 percent the following year. This was because of numerous central policies supporting grain farming, says Yao, which included exemption from the agricultural tax, a change from indirect to direct subsidies for grain growers, as well as additional subsidies for machinery and growing good grain strains. The result was a good grain harvest for three consecutive years, with total production reaching 497.45 billion kilograms last year, approaching the record. So, grain prices are likely to be stable this year.

In conclusion, there will be no major inflation this year due to grain price hikes given China's ample reserves and the limited impact of international market prices.

Be confident: the government is experienced enough to handle inflation

Two products contributed to price hikes last year: grain and service items. Prices of resources such as water, electricity and gas, will continue to rise due to the reformation of their pricing mechanisms and the acceleration of urbanization. Will this drive commodity prices up?

A large number of service products are government-regulated, says Yao, especially resource and energy products. Reform means allowing prices to be determined by market forces, but historical precedent suggests that once this is done, prices, after an initial rise, are more often than not driven back to a rational level. Macro-controls mean it is impossible for a service item soar in price and cause inflation, thus disrupting stable economic operations and people's lives.

China should always guard against inflation, Yao warned, for not only does it depreciate wealth, but it disrupts price signals making market mechanisms useless. It also affects people's expectations and leaves consumers and investors undecided about their economic future.

We must remain confident in our government, which is quite mature after two major periods of inflation, and has many means to deal with the phenomenon if it should occur, Yao concluded.

By People's Daily Online