BEIJING—Concerns over inflation in China are intensifying with consumer prices up more than 3% in May, just as many companies announce wage increases, but many economists and government officials still think inflationary pressures are likely to abate in coming months.
Figures published Friday by the National Bureau of Statistics showed the consumer price index rising 3.1% in May from a year earlier, which drew attention because the government has set a target for inflation not to exceed an average of 3% over all of 2010. But despite the breach of the psychologically important level, analysts said a confluence of factors including falling food and commodity prices will lead to reduced inflation in the second half of the year. So China may not see higher interest rates anytime soon.
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"We don't expect a knee-jerk reaction from policymakers," Bank of America-Merrill Lynch economist Lu Ting said in a note. Inflation is set to peak mid-year and decline thereafter, and no rate hike is likely until the fourth quarter of this year, he argues.
"Global commodities prices have kept falling a lot after the debt crisis broke out in Europe. This helps us to contain inflation pressures," National Bureau of Statistics spokesman Sheng Laiyun said on the sidelines of Friday's announcement. Sheng also pointed out that prices of agricultural products such as vegetables began to decline in May, and that higher year-ago figures will begin dampening monthly inflation readings starting in August.
Food prices have been a major contributor to consumer-price inflation in recent months. In May, food prices rose 6.1% from a year earlier, while non-food prices rose just 1.6%.
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Still, not all economists are convinced that the inflationary outlook is so benign. "Officials seem confident that price pressures will ease later this year, attributing much of the recent positive trend to base effects, but there are plenty of reasons to think that inflation can keep moving higher," said Royal Bank of Canada economist Brian Jackson. He points to strong money supply growth, negative real interest rates on banking deposits, and sharply rising wages in certain parts of the economy as inflationary risks.
Recent events such as strikes at three Honda Motor Co. suppliers in China, and big wage increases at Hon Hai Precision Industry Co., the electronics giant that has seen a string of recent suicides, have drawn attention to the issue of rising wage pressures in China. Local governments across the country in recent weeks have announced increases in minimum wages ranging from 5% to 27% that affect all companies.
Negative real interest rates, whereby savers lose money on their deposits after inflation is taken into account, are a particular concern. With inflation at 3.1% from a year ago in May, savers who 12 months ago put money in a one-year time deposit account, earning just 2.25% at the benchmark rate, would have lost considerable value in real terms.
At least some in China's policy-making apparatus share the concern. Li Daokui, an advisor to China's central bank, has been publicly arguing for higher interest rates. Rates on bank deposits, in particular, should be raised to protect the interests of depositors, he said in an interview with state-run People's Daily.
Other closely-watched statistics on Friday showed that economic activity is slowing. Industrial production expanded 16.5% in May, a tad slower than the 17.8% rise in April, and below economists' expectations of a 17.0% rise. Growth in fixed asset investment in urban areas slowed for the third consecutive month, rising 25.9% in the January-May period, compared to 26.1% growth rate in the January-April period.
"Slowing growth and rising inflation, which is what the May data shows, is a policy puzzle for the government," Tom Orlik, an economist for Stone & McCarthy Research Associates, wrote in a note. At the end of the day, he believes China will be more concerned with growth, especially given the uncertain state of affairs in the global economy. "The extent of the impact of the current sovereign debt crisis in Europe, and the policy controls on the domestic real estate sector, are not yet known. The government will want to see whether the Chinese economy slips up on either of these banana skins, before accelerating the tightening schedule."
