For some time now people have been keeping a close watch on the hottest international issue-soaring oil prices. In early 2007, the oil price was around $60 per barrel. After that, it spiked to the top. Within just a year and a half, international oil prices have increased more than 1.3 times. The rapid rise in international oil prices has formed tremendous pressure on the domestic market, and finally forced China to make adjustments in oil prices. However, given the high current domestic CPI (consumer price index), the rising international oil price and the expectation for re-adjustment in domestic oil prices have triggered people's deep concern towards inflation. Some even believe that an oil price hike will lead to overall price growth in commodities. Will it follow that the adjustment in China's oil prices really has an overall effect on the rest? I am not as pessimistic as some.
It should be recognized that given the important role of oil in the operation of the national economy, once oil prices rise, there would be a domino effect which not only directly promotes domestic energy price increases; but also has a "pushing up" effect on domestic prices by increasing industrial production costs. Particularly in the current context of the high domestic CPI, people have reason to worry about the possibility of inflation resulting from rising fuel prices. However, I believe we should not be too worried about inflation, because the effect of rising oil prices may not be as serious as many perceive.
First, rising oil prices are not the root cause of domestic inflation. Both history and experience demonstrate that although the oil prices have a certain impact on commodity prices, there is no definite correlation between the two. In other words, the rising oil prices do not solely lead to inflation. An obvious example is that fairly serious inflation occurred when the international oil market was running on a low both at home and abroad. As for China's current rapid CPI increases, more deep-seated internal reasons apply to China's economic operation in addition to the soaring oil price. It can be said that rapid investment and economic growth, the liquidity surplus arising from excessive monetary credit input, and the rapid increase in prices of agricultural products caused by economic structural imbalances are the deciding factors in China's high-level CPI for a period of time. Although rising oil prices have enhanced pressure on rising commodity prices, it is unreasonable to claim that oil price growth is the fundamental factor leading to the CPI hike.
Secondly, the composition of the CPI decides that the rise in oil prices will not necessarily trigger an entire price hike. In China, eight major categories of goods and services contribute to the CPI level. The categories and weights are: food (34%), recreation, education and stationery and services (14%), housing (13%), personal health care products (10%), transportation and communication (10%), clothing (9%), family equipment and maintenance services (6%), and alcoholic drinks and tobacco products (4%). It is clear that in this structure, the rising oil prices only directly affect people's transportation and traveling expenses. Due to the limited proportion of transportation expenditures in the CPI, the rising oil prices only have relatively limited influence on the CPI.
Third, the governmental departments can, by introducing new policies offset the upward pressure of the oil price hike on commodity prices. There are a variety of policies including: (1) Monetary policy. The Central Bank can intensify the contracting policy's momentum by adjusting interest rates and the statutory reserve ratio, opening market operations, and introducing other austere measures. It can also strictly manage monetary credit delivery, so as to offset the negative impact of the oil price hike on commodity prices. (2) Fiscal policy. The financial sector can ensure price stability in transport services and agricultural products and reduce the pushing up effect of the rising oil prices on overall commodity prices by subsidizing transport, agriculture and other industries that have a greater influence on residential living. (3) Industrial policy. China's current round of CPI growth is mainly caused by soaring food prices. Therefore, government departments can accelerate agricultural development and increase the supply of agricultural products by implementing preferential policies. Should agricultural product prices come down, this would partially offset inflationary pressures. (4) Price control policy. Given the possibility of the overall price hike, governmental departments can impose temporary price control policies to directly restrict the pricing behavior of enterprises and maintain the relative stability of prices.
In short, I believe that in the current economic environment, although the rise in oil prices has increased inflationary pressure in China, there is no sufficient evidence to claim that soaring oil prices will become the determining factors that will lead to the overall price hike. As long as our actions are timely and effective, we can certainly weaken the pushing up effect of the rising oil prices on the CPI.
(The author is the Associate Dean and Professor of the School of Finance at the Capital Economic and Trade University)
By People's Daily Online
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