Price pressures go beyond pork

PUBLISHED : Tuesday, 07 August, 2007, 12:00am
UPDATED : Tuesday, 07 August, 2007, 12:00am
 

M ainland leaders are getting increasingly concerned about inflation. They have good reason to be worried - and so do people in Hong Kong.


Alarm at the prospect of mounting price rises has spread to the highest levels of the national leadership. On Saturday, Premier Wen Jiabao felt compelled to visit a market in Beijing in an attempt to reassure consumers that the government will be able to rein in sharp food price increases. Meanwhile, state media quoted a clutch of other officials insisting that the authorities hold enough reserves of basic foodstuffs to ensure adequate supplies and to keep price pressures in check.


It seems that not everyone is convinced by their soothing words. Yesterday, the National Development and Reform Commission ordered a crackdown on food suppliers hiking prices. The move comes just days after the central government instructed local authorities to enforce price controls across a range of sectors, while warning companies against hoarding scarce commodities; both sure signs of growing inflation pressure.


Until recently, few commentators were much troubled by the prospect of inflation on the mainland. But after consumer price inflation hit 4.4 per cent in June, powered largely by a 60 per cent rise in the price of pork and a 38 per cent increase in egg prices, analysts sat up and took notice.


Even so, most downplay the threat, saying food price rises are the result of temporary supply disruptions such as the mainland's outbreak of blue ear disease in pigs. They argue that the virus will soon be bought under control and that price rises will abate as government subsidies persuade farmers to ramp up production to meet demand. Jonathan Anderson, chief economist for Asia at UBS, for example, forecasts that the mainland's headline inflation rate will drop back below Beijing's 3 per cent target before the end of the year.


Other observers are more pessimistic. Last week economists at Goldman Sachs forecast that inflation will exceed 5 per cent over the coming months. They argued that price rises are not being driven solely by food supply constraints, but also by the mainland's rising money supply. 'Inflation pressures will not subside without decisive monetary tightening,' they warned.


Lehman Brothers economist Rob Subbaraman agrees that inflation risks are rising. He has taken a standard inflation model used in developed countries which factors in how fast an economy is growing relative to its long-term trend, growth in money supply and changes in import prices, and applied it to the mainland. The results are sobering. According to his projection, the consumer inflation rate could rise as high as 9.3 per cent next year.


Equally troubling is his projection for Hong Kong. After years of deflation, Hong Kong's inhabitants have become used to falling or stable prices. Now, however, with higher prices on the mainland, capacity constraints at home, and a weakening currency bumping up import prices, Hong Kong may be heading for a bout of inflation. Mr Subbaraman's model indicates consumer price rises of 8.2 per cent for Hong Kong next year.


The territory may already be feeling the pressure. Pork prices have shot up by around 20 per cent over recent weeks, while a dispute over rising beef prices has disrupted supplies. If the pessimists are right, the increases will soon begin spreading, and we may have to get used to higher prices all round.


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Price pressures go beyond pork

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