National Bureau of Statistics recently released the status of national consumer price level of the first quarter, according to which, Consumer Price Index (CPI) of the country rose 2.7%, approaching the alarm line of 3%. The estimation of industrial professionals therefore was proved to be true. Given close ties between the growth of CPI and inflation, people now are more concerned about whether the CPI will continue to rise in the near future.

Effect of last year's price rise extended to this year

In an interview on the reason of CPI growth, senior economist of the Asian Development Bank representative office in China Zhuang Jian noted that the high-speed macroeconomic growth, adequate capital of the banks, and increasing income of people can all lead to general price level rises. Statistics show that China's high-speed economic growth has sustained for the fifth year. Right now the country is in the longest period of prosperity since its reform and opening up. Its rapid economic expansion will definitely lead to rapid growth of demand for the means of production, thus pulling up prices of production materials. And the rising prices of production materials not only will, sooner or later, promote price hikes of consumer goods, but also will lead to rises in prices of services. In addition, the reform of payment system of civil service, the improving social security, the increasing income of people, the stronger consumption power, etc, have promoted prices growth.

The effect of prices increase of last year has become a major factor pulling the general price level up in the first quarter of this year. Spokesman for National Bureau of Statistics Li Xiaochao said that consumer prices rose since the beginning of this year and there was considerable pressure on inflation. But by deducting price hikes resulted from food prices rises in last year, the fresh rise of prices of the first quarter this year was only 1.2%, almost the same with that of last year.

In addition, Li analyzed that food and agricultural production are exposed to more uncertain factors such as climate. Food prices rose 6.2% over the same period last year and became the major pulling factor for price hikes; price reforms of resources products also led to price increases of supply services such as water, gas and heat. Meanwhile, prices of primary commodity rose by a larger margin in the international market. The pressure is being transmitted to the domestic market.

Data shows that housing price also went up by 3.8% in the first three months, which, undoubtedly, has become an inflationary factor. The National Bureau of Statistics said that 15 years ago the proportion of living costs in the consumer price index was only less than 5%. The figure hit 13.2% in 2006. On the one hand, the rise in housing prices will not only stimulate price hikes of steel, cement, building materials and other products; on the other hand, the overheated investment in fixed assets is also bound to exacerbate tension of supply of energy, electricity, coal and transportation service, and, lead to price increases of related products. Both price rises of housing and these products will accelerate the hike in consumer prices.

Price may keep going up

Telling from the data, it is no doubt that China's economy surged rapidly in the first quarter. However, many experts believe that such a surge is still acceptable and the CPI level may return to normal level in the second quarter.

The core CPI level, after deducting the influence of last year's price hike, still remains stable in the first quarter of this year. According to Chen Dongqi, vice president of the Institute of Economic Research of the State Development and Reform Commission, currently there is no obvious evidence demonstrating that the overall price level has significantly broken away from the "basic stable" range. It is still within the acceptable range of the society. In a short term, there is no risk of high inflation and the national economy is still following the path of "high growth and low inflation". UBS also agreed that the sharp increase of the first quarter is temporary. The core growth rate of CPI is milder than that of the overall CPI level. It is estimated that the data will return to normal levels in the second quarter.

However, both government and industrial professionals pointed out that there was the pressure for the CPI to continue to rise and, we must maintain a high degree of vigilance. Li Xiaochao acknowledged at the press conference that China currently has some inflationary pressures and will have to face the challenge of rising CPI in the future. Researcher of Peking University's Research Center of National Accounts Cai Zhizhou said that most of the cost-push inflationary pressures have been digested by producers. With the consumer demand accelerating, demand-pull inflation pressure has been strengthened. If the two inflationary pressures are combined, they will have a major impact on prices or even the country's economy as a whole.

Liu Weiming, deputy director of China Center for Economic Research of Peking University, claimed that the prices will rise further. "If we believe that our major problem is insufficient demand, then we have to further accelerate our economic growth, so as to solve the problem of employment and promote economic expansion. The government will need to endeavor to maintain a high speed of economic growth. Therefore, either from the perspective of governmental policy or telling in terms of the natural cycle of the market, prices are rising as a result to come." However, Liu thinks that this kind of rise is an important symbol marking the beginning of a new round of economic prosperity, instead of a terrible thing.

Experts also believe that consecutive years of economic prosperity have created remarkable national wealth at an extraordinary speed, but meanwhile, it also enhanced systemic risk day after day. There is no need to be over-worried about the current price hike and inflation pressure. But we must not treat it lightly.

Can raising interest rate curb the rise in CPI?

Because the CPI is the main determinant of interest rate decision, people are generally concerned about whether the increase of 2.7% will result in further interest rate increase by the central bank. China's CPI alarm level is 3%. In order to make the actual interest rates positive, the most direct means is to raise interest rate. Nevertheless, some experts believe that instead of a tough mean of interest rate increase, raising the deposit reserve rate perhaps is more moderate.

At present, most people believe that the central bank is not likely to raise interest rate in the short term. Lu Wenlei, analyst with the research section of the Shenyin-Wanguo Securities Co., Ltd predicted that there will be a 1-2-month observation period following the interest rate rise in mid-March. "We think that the next sensitive period may occur in mid-May at the earliest. But a more reasonable time would be sometime between June and July." UBS has the similar view, which believes that current data will not lead to a strong policy response.

"At present, the major factors of the CPI rise is the hiking food prices. But this can not be resolved by increasing interest rate." CITIC Securities researcher Cheng Weiqing said during an interview that the negative role of interest rates growth has become increasingly obvious. As a result, the central bank is right in a dilemma in making a related policy. Han Zhiguo, famous economist and head of Beijing Banghe Fortune Research Institute pointed out, "If the central bank further raise interest rates, international hot money will continue flowing into the country. As a result, the pressure of RMB appreciation will be further intensified."

Speculations on interest rate increase are still on-going. But practice has proved that monetary policy alone can hardly ease the problem of excess liquidity. The fundamental solution lies in the development of capital market, reform of China's resources allocation mechanism, and, improvement of investment and consumption structure. By these means, the country can realize a virtuous cycle and become an economic power.

Both government officials and experts agree that no matter what kind of policy the government will adopt, it should seek to smooth its economic growth and maintain its sustainability.

By People's Daily Online