Despite expert predictions that the Consumer Price Index (CPI) may reach 5.6 percent growth in July and 4 percent for all of 2007, China Securities Journal (CSJ) cited the newly released Monetary Policy Implementation Report by the central bank as saying the real CPI increase is not as big as people thought.

The advancing CPI has caused questions among investors as to whether the inflation is serious enough to justify intensified government macro control.

Experts said considering the growth pace of China’s economy, the previous 3 percent CPI warning rate should be upgraded to 4 percent.

According to CSJ, monthly CPI growth in the 5 percent range doesn’t reflect long-term inflation. Xie Fuzhan, head of the National Bureau of Statistics said late last month that there is no clear sign that China is facing inflation. In fact, short-term price increases exert little effect on the whole economy in the long run. China’s CPI in 2007 can reach 4 percent, but even that can still be healthy, he added.

The booming Chinese economy, with an annual growth rate of over 10 percent, has been pushing up prices of consumer goods. Shen Minggao, chief economist of Citibank China said the 3 percent CPI growth limit may only apply to an 8 percent GDP growth; given the 11.5 percent GDP in the first half of the year, a 4.5 to 5 percent increase is acceptable.

The United States usually has an economic growth below 3 percent, while the latest released CPI reached 2.7 percent growth, almost the same rate as economic growth. Even taking account their different stages of economic development, the difference between the two countries can be surprisingly big, Shen added.

Another driving force behind the CPI are rising salaries, with urban residents’ disposable income increasing 10.4 percent last year and 14.2 percent the first half of this year and rural residents’ disposable income growing 13.3 percent. Higher incomes are driving up market prices.

The report by the central bank also included inflation pushers such as rising labor and energy costs, which may cause inflation in the middle and long term.(chinadaily.com.cn)

Copyright Fund China 2009.

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