Food key driver of mainland inflation

PUBLISHED : Wednesday, 16 February, 2011, 12:00am
UPDATED : Wednesday, 16 February, 2011, 12:00am

Severe drought in the north and cold in the south pushed up general food prices across the mainland last month, triggering expectation of another rise in interest rates soon.

The National Bureau of Statistics yesterday said food prices rose 10.3 per cent in January, boosting the overall consumer price index, an indicator of annual inflation based on a set basket of goods and services, to 4.9 per cent.

The CPI rose from 1.5 per cent in the beginning of last year to a peak of 5.1 per cent in November. It eased to 4.6 per cent in December as Beijing introduced a series of monetary tightening measures.

Food inflation, however, is showing no sign of abating with price rises for grains - which make up the basic food items - surging 15.1 per cent.

Among the other major food items, meat and poultry prices rose 10.9 per cent, eggs 20.2 per cent, fish 11.1 per cent, fresh vegetables 2 per cent, and fruit 34.8 per cent.

Rural regions have been hit harder, with prices rising 5.2 per cent compared with 4.8 per cent in urban areas.

There is now widespread reluctance by farmers to sell last year's harvest to the state procurement service.

Production at some flour mills in Shandong province, one of the hardest hit by the drought in the north, is running below capacity with a diminishing supply of wheat, reported yesterday.

Professor He Qiang, a specialist in futures markets at the Central University of Finance and Economics, warned that steadily rising grain prices in the global markets along with the lingering drought in the nation's wheat belt would push grain prices on the mainland even higher from next month.

Based on the drought and the persistent rise in farming costs, Cheng Manjiang, a senior researcher at Bank of China International, argued that analysts might have been too optimistic at the end of last year about China's inflation this year.

Judging from the stern realities both in domestic and world markets, Beijing would have to reconsider its inflation target, Cheng said.

The National People's Congress will announce the target early next month.

Except for raising farm subsidies, there are no alternatives for stabilising markets, Cheng said. Any moves China makes to maintain food self-sufficiency could be enormously costly.

Most mainland-based economists expect inflation to worsen in the first half of the year before easing off in the following months.

Ba Shusong, a senior economist with the State Council Development Research Centre, predicted that January to February could mark the high point in inflation.

Wang Tao, an economist at UBS, said the central bank would possibly increase interest rates twice in the first half of the year to counter inflation.

The first rate rise would come as soon as next month, according to Zhu Baoliang, an economist at the State Information Centre.

Yesterday marked the first time the statistics bureau had used a new method to calculating inflation, reducing the weighting of food and increasing that of items related with housing in the CPI 'basket'.

However, officials said the change was minor and the food weighting had only been reduced by 2.21 percentage points.

January's CPI would still have been 4.9 per cent using the old method, they said.

Qu Hongbin, HSBC's co-head of Asian economics research, said the adjusted CPI weightings had only had a marginal impact on the inflation rate, although the figure was lower than market forecast of about 5.4 per cent.

'The downside surprise in January's CPI was mainly attributed to slower than expected food price growth,' Qu said.

But he warned that the country would still face inflationary pressures from continued bad weather, excessive liquidity and the continuing surge in producer prices.

He expects inflation will surge to between 5 per cent and 6 per cent in the coming months and urged the central government to continue its tightening efforts.

Separately, the General Administration of Customs reported that China's total foreign trade last month was worth US$295 billion, with US$150.7 billion in exports and US$144.3 billion in imports.

While trade expanded more than 40 per cent year on year, the surplus shrank to US$6.45 billion, below the US$10 billion mark for the first time in eight months.