Government Ready to Intervene in China's Inflation Troubles

By Mike Caggeso
Staff Writer

China’s growing inflation rate will force government intervention later this year, Su Ning, deputy governor of the People’s Bank of China, said.

Inflation hit a 10-year high at 5.6% in July. Food prices — hampered by a lackluster wheat harvest and an outbreak in pig diseases — accounted for 80% of the inflation, Ning said. Full-year inflation may exceed the central bank’s target of 3%.

“The People’s Bank of China has been closely monitoring current rising inflation,” Ning told reporters at a press conference in Beijing yesterday (Wednesday). “So far, the measures we’ve taken to curb price increases have shown some effect.”

Such measures have been its consistent raising of interest rates — already four times this year — to combat the wildly growing economy, up 11.9% from a year earlier, the Wall Street Journal reported.

China Finance Minister Jin Renqing was dismissed from his post yesterday, but Ning said the change won’t affect policy.

Ning said that curbing food-price increases is the key to keep inflation from running away with the economy. A major difference between the two is that inflation is more tied to consumer sentiment at the cash register.

This is a significant battle the central bank faces because demand for food won’t decrease in China any time soon at its current pace. That burden is carried by farmers and manufactures, which along with rising pork and wheat, will take another hit when fall harvest will reveal the effects of summer floods and droughts.

The BBC estimated harvest could down 10%, which will only fuel inflation, which will take spending power out of consumers’ wallets.

Ideally, China wants to cool the economy in order to stop inflation, as evidenced by its raising of interest rates. That way, consumers retain their spending power and a positive investing morale.

But food inflation continues to slip out of control, it sets up a potential dangerous situation where the economy would cool because people, consumers and manufactures can’t afford to buy, though demand is still screaming.