China Information News published a report by the Chinese National Bureau of Statistics on inflation trends in the last two years last week. The report stated that inflation has become a major problem in the current Chinese economy. The report also provided the main characteristics, reasons, and projected trends of inflation.
Four Characteristics
The report listed four main characteristics of inflation in the last two years: 1) highest in the last decade; 2) mainly affecting food and housing; 3) more industries are now impacted; and 4) higher in rural areas than cities.
According to the report, between 1997 and 2006, inflation was below 2 percent a year. In 2007, inflation was 4.8 percent. Between January and July of 2008, inflation was 7.7 percent.
Of the main two areas of inflation, food prices rose 2.3 percent in 2006, 12.3 percent in 2007, and 19.5 percent in the first seven months of 2008. Housing prices rose 4.5 percent in 2007 and 7 percent between January and July of 2008.
In other areas, price increase of service and household items rose from 1.2 percent in 2006 to 2.6 percent in the first seven months of 2008. During the same period, inflation rate for medical services and personal items rose from 1.1 percent to 3.3 percent.
Inflation was higher in rural and inland areas. In 2007, inflation was 5.4 percent in rural areas and 4.5 percent in cities. In the first seven months of 2008, inflation was 8.3 percent in rural areas and 7.4 percent in cities. In 2007, inland areas experienced 5.3 percent inflation while Eastern Coastal Areas experienced 4.3 percent inflation. Between January and July of 2008, inflation was 8.5 percent and 7.3 percent in these two respective regions.
Main Reasons for Inflation
According to the report, the top contributor to inflation was the international economy. Other reasons included imbalance between supply and demand in some areas, the continuing increase in material costs, and the adjustments to the system. The last factor was excess liquidity.
In the international market, inflation has been about 5 percent for the last four years. Rapid growth in countries such as China, India, and Brazil increased the demand for raw materials in the world. Depreciation of the U.S. dollar also furthered price increases in petroleum, coal, crops, iron ores, metals, and other fundamentals in the world market.
World crop prices hiked up significantly between September 2006 and June 2008. The crop price index in July 2008 was the highest in 30 years. Between 2003 and 2007, metals and mining product prices rose 11.8 percent, 34.6 percent, 22.4 percent, 56.2 percent, and 17.4 percent per year respectively. In the first seven months of 2008, prices increased by 4.2 percent. Cumulatively, since 2006, prices for metals and mining products increased by 251.6 percent. Such dramatic inflation in the international market directly caused much higher costs for Chinese imports.
Projected Trends
The report highlighted factors that will likely alleviate inflation in the coming years. Firstly, inflation index in China has been dropping for the last three months, and is likely to continue to flatten in the next several months.
In the world market, prices for petroleum and metals such as zinc have reduced. Crude oil prices dropped from US$145/barrel in July to US$115/barrel in August, reflecting a 20 percent drop in one month.
The report listed several “pressure points” that remain for inflation. First, agricultural production materials continue to increase in price, which is likely to push prices for agricultural products even higher. Secondly, from a historical perspective, other raw materials, such as crude oil, rice, wheat, corn, fuel, and labor prices remain high.
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