The continuous rise of consumer prices will, understandably, fuel worries about emerging inflation, but it does not yet warrant an aggressive use of monetary policy.

The country's consumer prices soared by 3 percent to another six-year high last month after the consumer price index (CPI) just touched the highest point since 1997 in October.

Two months of price hikes clearly indicate that the threat of deflation has been substantially weakened as the Chinese economy evidently picks up after the outbreak of SARS (severe acute respiratory syndrome) early this year.

And to the relief of some economists who have nervously watched the yawning gap between investment growth and sluggish consumption, the latter economic engine finally puts on a spurt to sustain the growth momentum of the national economy.

The accelerated CPI rise is, in essence, a rebound from years of deflationary pressures. But as a key inflation gauge, it can hardly boost market sentiment without causing considerable caution against overheating, especially when excessive investment in certain sectors already topped the monetary authorities' target list.

The People's Bank of China, the country's central bank, has adopted various monetary instruments to rein in the breathtaking surge of loans commercial banks lent in the past few months. And it appears ready to turn to its tool box again if needed.

At the moment the central bank's credit squeeze begins to work - the growth pace of new loans slowed down in October - the ongoing CPI rise seemingly reconfirmed the monetary authorities' early efforts.

However, a step further to tighten money supply will not be justified by the present surge in consumer prices.

Agricultural price hikes, resulting from a reduction in production jointly caused by adjustments to the production structure and natural disasters, are the main driving force behind the CPI rise. Such price hikes are crucial to ensuring a moderate growth of farmers' incomes, which is still unlikely to catch up with the pace of urban residents' income growth.

The bigger picture of the Chinese economy also points to an overall abundance in supply.

It is premature to conclude that the current rise in consumer prices has decisively changed the situation.

So the monetary authorities must tread carefully to prevent excessive investment and not undermine needed consumption growth.

(China Daily December 16, 2003)