Though the consumer price index (CPI) keeps rising rapidly, the
producer price index (PPI), a leading indicator of production
costs, shows a declining trend. This suggests that the increase in
the CPI is mainly the result of price hikes for food. The decline
of the growth rate for non-food prices shows that supply and demand
are stable, providing the basis for a gradual descent in prices
later this year.
According to the National Bureau of Statistics, the PPI grew by
2.4 percent in July, compared with 3.3 percent in January. The PPI
growth was 0.2 percentage points higher in August than in July, but
the overall trend is still downward.
The slowing growth in the PPI is mainly the result of declining
production costs. Though the cost of living rises with food prices,
the slowing growth of production costs means an overall trend of
slow growth of the PPI.
The rate of CPI growth hit 6.5 percent in August, leading to 3.9
percent year-on-year growth from January to August. Higher food
costs have led the faster rate of CPI growth. The prices of
industrial consumer goods and services have risen by less than 1
percent this year, while food prices have soared, which has been a
major factor in increasing the CPI growth rate.
The relationship between supply and demand affects price levels
in the short term. The huge supply potential, together with
restricted growth in demand, is a basic reason for the declining
growth rate of non-food prices.
The most recent round of economic growth kicked off after the
shortage economy was eliminated. In this new phase, output has
reached a certain scale, productivity is increasing, the supplies
of capital and labor are abundant and the supply of applied
technologies is expanding.
As the recent round of reforms takes hold, enterprises' ability
to react to market fluctuations will improve. This means the
potential to expand production and supply is huge. When there is
demand, there will be a corresponding growth in supply.
On the other hand, demand is getting more and more restricted.
Since 2003, the central government has tightened its control of
land and capital. It has put in place multiple measures, such as
raising the threshold to control the unchecked binge on fixed
Since last year, the government has controlled the export of
energy consuming, polluting and resource-intensive products by
lowering tax rebates and collecting export tariffs. It has also
tightened control of the export of products affected by trade
conflicts. Generally speaking, the control of demand growth has
Having a high supply potential and controlled demand means a
coordinated relationship between supply and demand. The possibility
of a supply shortage or inflation is slight. What is more, partial
oversupply and overcapacity could be possible in the future.
Rising food prices, which have a huge impact on the CPI growth
rate, do not mean there is something wrong with agricultural
production. Grain production increased every year from 2004 to
2006. That continued this summer, when output saw a 1.3 percent
year-on-year increase. The foundation for the grain supply is
Four short-term reasons contribute to the rising food
First, world grain production decreased last year, and major
producers such as the United States have been using corn to make
fuel. Second, the State grain reserve has not caught up with the
changing market. Third, the domestic capacity for making ethanol
from corn has improved. Fourth, food prices were affected by
epidemics and seasonal factors.
Considered from a long-term perspective, these factors reflect a
normal trend in economic development. The prices of agricultural
and food products will gradually increase with industrialization,
urbanization and rises in income levels. This reflects a natural
adjustment of industrial-agricultural and urban-rural income
distribution patterns. It also means farmers and rural residents
are enjoying the fruits of economic growth. Against a background of
rapid income increases, such a change will not have a clear impact
on the daily lives of most urban families.
Grain prices are stable. The major factors pushing food prices
are the higher prices of eggs, meat, poultry and related products.
These are mainly short-term issues and the government has been
taking various steps to stabilize prices. For example, the
government has restricted the development of the bio-energy
processing industry, enhanced epidemic prevention and control and
established insurance and provided subsidies for pig and poultry
farming. With such government support and stimulated by the price
hikes, the production scale has expanded.
Of course, the production of such products depends on natural
cycles and any increase in supply is destined to be gradual. It is
estimated that the changes in supply will be evident by next month.
Therefore the growing trend of food prices will peak next month,
and then fall. The CPI and PPI growth rates will both see a
In conclusion, prices will see a downward change in the future.
The PPI growth rate for the whole year will be lower than that of
the previous year and the CPI growth will be about 4 percent for
The author is a researcher with the State Council Development
(China Daily September 28, 2007)