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Early reports of shocking price hikes in areas hardest-hit by the bitter snowstorms might have made it relatively easy for the public to swallow a 7.1-percent consumer inflation in January.

Given the severity of the supply shock caused by the worst snowy weather in at least half a century, a short-term acceleration of inflation at this level, though the highest in a decade, is still an acceptable result of the Chinese government's efforts to curb overall price rises.

Had the authorities not tried hard to increase food supplies and introduced stopgap price controls on a number of daily necessities before the snowstorms, the consumer prices may have gone through the roof.

On back of a 6.5-percent headline inflation in December, it took a lot of endeavors to limit growth of the consumer price index to 7.1 percent in January when both snowstorms and the coming Chinese New Year were significantly pushing food prices up.

However, while they can breathe a sigh of relief for managing to cope with short-term inflation factors, policymakers should not stop fixing their eyes on long-term inflation.

Aggressive price measures that the authorities have adopted will continue to take effect and thus slow price hikes in the near future. But the country's inflation outlook may worsen in the long run if the structural imbalance in the economy cannot be properly and promptly addressed.

The acceleration in inflation has so far been predominantly driven by food. But that does not mean the current round of inflation will be short lived if the supply of food can be raised.

While food prices surged by 18.2 percent year-on-year, non-food price inflation remained low at 1.5 percent in January. The slow rise in non-food prices is rather a source of increasing inflationary pressure than a reassuring check on further inflation.

The surge in producer prices which jumped 6.1 percent in January, the fastest growth in more than three years, indicates that rising energy and food costs are considerably pushing up manufacturing costs.

Besides, the enforcement of higher environmental and labor standards will add to companies' costs. Hence, non-food price inflation is already in the pipeline.

The complexity of China's growth prospects this year makes it very difficult for policymakers to fight an all-out war against inflation. A tightening monetary policy is essential to preventing serious inflation. But it may also risk slowing the growth of the Chinese economy by too much as a US slowdown or recession weighs increasingly heavily on the country's export sector.

The policymakers should certainly be forward-looking and prepare for the possible downturn.

Yet, an inflation rate above 7 percent currently warrants more concerns over entrenched inflationary pressures than worries about a temporary farewell to double-digit economic growth.

(China Daily February 20, 2008)


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