Opinion

Conquer inflation

(China Daily)
Updated: 2010-11-23 14:18

The ongoing war against soaring consumer prices is one that the Chinese government must fight and fight well.

Domestically, inflation not only disproportionately hurts the poor, it will also hinder the country's pursuit of consumer-led growth in the coming years.

Internationally, the price rises will only add to the uncertainty about the growth prospects of the Chinese economy, which is essential to a lasting global recovery.

The latest move to contain excess liquidity and the forceful measures that the central government has taken to stabilize prices show the determination of Chinese policymakers to fight inflation.

Though these moves may not be enough to tame inflation once and for all, they are a good start before more aggressive actions become necessary to battle inflation that is unlikely to end anytime soon, as debt-laden rich countries keep flooding the world economy with their newly printed money.

Last Friday, the Chinese central bank ordered a 50 basis point increase in reserve ratios for banks in an effort to cool the country's fastest rise in consumer prices in two years. This followed a hike in benchmark interest rates for the first time in three years.

In another move, the State Council ordered local governments to take detailed steps to rein in surging food prices, which usually account for one-third of the country's consumer price index.

Unconventional as it may look, the central government's call for price intervention by local authorities to drum up supply and crack down on hoarders and speculators will help quash expectations of higher prices.

The double-digit rise in food prices is surely to blame for the 4.4-percent consumer inflation in the year to October. But this does not mean major food items are in short supply.

In fact, preliminary data indicates that the country's summer harvest has not suffered too much from bad weather and the autumn harvest, which accounts for three quarters of total grain production, is projected to register a new record high.

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It is obvious that the ongoing food-led inflation is largely a result of excess liquidity in the home market.

Policymakers have shown no hesitation in tightening monetary supply though the pace of such tightening is still subject to enormous pressure from international capital inflows.

Better than that, the Chinese government has also attached great importance to raising unemployment benefits, pensions and the minimum wage in line with inflation.

If such expedient fiscal policies can be forcefully implemented, they will serve as a useful measure to help low-income groups cope with the present inflation. More importantly, they may even be extended to address the long-term problem of the widening income gap.

By substantially tilting fiscal policies in favor of the poor, the fight against inflation can give a big boost to China's pursuit of inclusive and consumer-led growth. That is another good reason to fight it hard.