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China Inflation Might Spill Out of Food

Reuters
Monday, 19 May 2008 | 1:24 AM ET

China's inflation might spill over from food to other sectors as strong domestic consumption convinces producers that they will not lose market share if they raise prices to increase profits, a senior official said in remarks published on Monday.

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CNBC.com
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Chinese retail sales rose 22.0 percent in the year to April, the fastest pace since the government started gathering monthly data in 1999, while fixed-asset investment in urban areas rose 25.7 percent in the first four months from a year earlier.

"If the expansionary trends in both investment and consumption are sustained, the current food-led rise in prices might become broad-based, further increasing inflationary pressure," Xu Lianzhong, a senior economic planner, wrote in the official China Securities Journal.

Xu works in the National Development and Reform Commission's price supervision office. The article carried his name, but not his title.

Consumer inflation picked up to 8.5 percent in April from a year earlier, near a 12-year high, while producer price inflation edged up to 8.1 percent, the fastest pace since late 2004.

Market competition and productivity gains have kept a lid on consumer prices, with inflation to date mainly confined to food.

But Xu said historical experience showed that when both investment and retail sales powered ahead, producers found it much easier to pass on price increases.

In 1988, for example, when investment rose by 25.4 percent and retail sales by 27.8 percent, the consumer price index climbed 18.8 percent, Xu wrote. And in 1994, when investment and retail sales both rose 30.4 percent, the CPI jumped 24.1 percent.

"The current economic situation is moving towards a scenario where both investment and consumption are ballooning. The possibility of even worse inflation objectively exists," Xu wrote.

He said the priority now for the authorities should be to strictly curb capital spending, especially investment in the pipeline spurred by this year's five-yearly reshuffle of government personnel.