New figures released by the National Development and Reform Commission show that consumer prices in China have risen by 4% in 2004, the highest jump since 1997. However, consumer-price inflation for the month of November slowed to 2.8% year-on-year, marking the lowest rate in 12 months.

 

The mixed picture painted by the new figures suggest that while 2004 as a whole has seen high inflation that peaked in July and August, a slowdown seems to be underway. In October, the People's Bank of China raised interest rates for the first time in almost a decade. With consumer-price inflation abating, a further rate increase in the first quarter seems less likely now. The recent fall in consumer-price inflation can most likely be attributed to lagging effects of the macroeconomic control policies that the Chinese government began implementing in the first part of 2004.

 

The National Development and Reform Commission highlighted problems that still exist with consumer price fluctuations in China. Upward pressure on prices for coal, electricity, oil, and transportation persist due to significant tension between supply and demand for such resources. The price of oil and oil products jumped 10.5% year-on-year during the first 10 months of 2004, while the price of coal rose by 13.4% during the same period. High costs for energy and raw materials, in turn, have an impact on consumer prices for a variety of goods. According to a report from the state media, the commission plans to take steps to ease the tension in the supply of oil, coal, and electricity.

 

The high cost of oil, in particular, has caused China's producer-price index to remain elevated. While consumer prices fell in November, the 8.1% increase in producer prices in November was barely lower than the month before, and higher than in September. The declining value of the US dollar has also weakened China's international purchasing power because of the RMB's peg to the US currency. Some analysts believe that the Chinese government could lift currency controls if consumer prices continue to fall while producer prices rise. If, under such conditions, the trading band for the RMB were adjusted up and down by three percentage points, it would mitigate the pressure on producer prices.