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Stand against inflation
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Premier Wen Jiabao acknowledged yesterday that it will be hard to attain this year's goal of keeping inflation at about 4.8 percent given the accelerated price hikes in the first two months this year.

That does not sound like heartening news for Chinese households, especially low-income families, whose meager purchasing power is being eroded by the highest consumer inflation in more than a decade.

Yet, the premier's matter-of-fact manner assured the public that the government has come to grips with the severity of soaring prices. More important, the premier made it clear that the battle against inflation is not only a top priority this year but also a key task for the coming five years.

This marks a shift in the focus of the economic policies. After five years of golden expansion featuring double-digit GDP growth and low inflation, it is time for policymakers to strike a new balance between rapid and stable growth and mounting inflationary pressure.

Only by defining it as a long-term task can policymakers properly prepare themselves for the unfolding anti-inflation battle that is much complicated by domestic factors as well as external uncertainties.

With a grain reserve of 150 to 200 million tons and an adequate supply of most major industrial products, China is well positioned to overcome any supply shock that sometimes can send prices through the roof. In this sense, the country's current price gains mainly driven by rocketing food prices will be manageable.

However, taking into consideration the country's stringent labor and environmental standards, it is predictable that domestic enterprises will face upward pressures on their cost and try to pass them on to consumers eventually.

And the currently low domestic energy prices controlled by the State are also not a comfort for, sooner or later, the country will learn to live with higher energy prices.

While such domestic factors tend to increase inflationary pressures, a looming US-led slowdown of the world economy is adding to China's risk of drastic economic fluctuation.

A sharp decline in external demand will slow China's economic growth and push up unemployment. That will force policymakers to rethink tightening the monetary which is essential for the success of the war against serious inflation.

Flexibility in policymaking is needed to cope with the changing economic reality at home and abroad. But during the fight against rooted inflation, consistency in policies is required to check the public's inflationary expectations, a high-inflation by-product that will fuel further price gains.

(China Daily March 19, 2008)

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