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Updated: 2007-06-28 11:20

The economy has seen a double-digit growth for a few years now. So the 3.4 percent rise in the CPI, or consumer price index, in May should not pose that big a problem, many experts and analysts would say. But ask the less privileged people, and you get a totally different picture about life because inflation for them is a real threat.

To understand their worries, it's important to recognize the driving force behind the current round of inflation: rising food prices. As such, the traditional weapon against inflation has proved mostly ineffectual - because the inelastic demand for food is insensitive to all monetary measures.

Contrary to popular belief, raising the interest rate and other measures to tighten liquidity won't check inflation because the CPI is driven largely by consumers' demand for food rather than the aggregate demand of society. In fact, such measures could even increase inflationary pressure by raising the cost of doing business in China.

A slight rise in the CPI above 3 percent, generally accepted as the starting point of inflation, may not be felt much in the urban areas. But underprivileged people living in less developed areas know what it means. For instance, life for jobless laborers in Jiamusi has become even more difficult after the rise in food prices. That's because a family of three in the medium-sized city of Northeast China's Heilongjiang Province can get only up to 500 yuan a month as unemployment benefit.

"We have to cut our daily consumption of pork and eggs. An extra 8-10 yuan for a kg of pork make a lot of difference for my family. It makes our life more difficult," says a laid-off worker. In the past two months, the price of pork in Jiamusi has jumped 58 percent to 20 yuan a kg, and soybean oil costs 28 percent more that it did a year ago.

It's not that people in big cities such as Shanghai don't feel the pinch. Many people in the country's commercial capital are making long trips to wholesale markets because they can buy foodstuff and other products at 10-20 percent less than what they have to pay in neighborhood shops. "The money we save is worth the extra effort," says a middle-aged woman. Lower prices are not enough for her because she visits the market late in the day to avail of all the possible discounts.

Some people even buy food products from the gray market to save money, and thus put their health at risk. "But I don't have a choice," says a woman surnamed Deng, who works as a cleaner in a city business center. And thankfully, "none of us has fallen ill so far", she says.

More cautious shoppers, and those who can afford it, have no option but to increase their spending on food products. Britain-based TESCOLegou, one of the world's biggest retailers, has raised prices of food products in all its 17 supermarkets in Shanghai from April. Among the six major food products that are costlier are pork (30 percent more), eggs (15 percent), grains and edible oil (about 10 percent). "We have raised prices of food products in proportion to the increase in our purchase prices," says TESCOLegou purchase department employee Tang Tian.

Higher food prices have hurt hotels and restaurants, too. "The prices of the main ingredients in our buffet meals have risen. But we have to bear the extra cost because we cannot raise the prices," says Shenzhen-based Pavilion Hotel staff Nancy Zhang. The reason is simple: raise prices and lose customers.

While economists say raising the interest rate could help lower aggregate demand in the long run, they doubt if the traditional monetary policies of tightening liquidity can have much of an impact on the food-price driven inflation.

The CPI rise is widely seen as temporary and purely domestic in nature because food prices are by far the largest driver of price index in China, according to Jonathan Anderson, UBS Securities' chief economist for Asia. The expert with one of the largest financial institutions in the world says: "We don't see inflation as a serious issue for China today. Core inflation is still around 1 percent, and we haven't seen signs of acceleration so far."

Statistics show that against the small increase of 1 percent in the cost of non-food products in May, food prices jumped 8.3 percent, with egg prices rising the most (37.1 percent), followed by meat and poultry products (26.5 percent), edible oil (21.4 percent) and grains (5.9 percent). The other components of the CPI, however, showed only a small rise or even dropped. For example, prices of household appliances rose 2.2 percent, while transport and communication charges were down 0.5 percent and the cost of entertainment, educational materials and services fell 1.2 percent.

"Although the CPI rate has remained modest, we are worried because the demand for food is inelastic," says renminbi University professor Li Yongsen. But the CPI increase, triggered largely of rising food prices, won't have as great an impact on the people as it did a few years ago.

In the "poorest areas of China, rising food prices really create a burden on people". The general living standard in the country, however, has improved, and the quality of life is no longer measured by the amount spent on food. "More and more factors should be taken into account."

Experts advise a cautious approach to the interest rate. "Theoritically, the interest rate should not be changed very often to ensure economic stability," Li says.

Economists and analysts are worried over the impact of interest rate hikes on inflation. "Even if the central bank raises the interest rate further, it will take some time before it bears the desired results." Haifu Futures Co analyst Li Jingyuan says.

An increase in interest rate does not necessarily serve all the purposes, the experts say, especially because it gives rise to other financial problems. "Raising the interest rate is likely to increase the capital cost of the entire society and put pressure on those doing business in China," says Li Yongsen.

Some economists even maintain that it's a matter of debate whether a 3 percent or higher rise in the CPI should be seen as a sign of inflation. Given the growing size of China's economy, the CPI is rising at quite a moderate pace. According to CITIC Securities analyst Su Chuang, there's still room for the CPI to go up further without creating panic. "The inflation indicator is expected to reach about 4 percent in the third quarter of this year," Su says. But that doesn't call for alarm.

"More macro-economic controls are likely to be imposed in the near future to bring down the excessive liquidity in China's capital market," according to an economist with Chinese Academy of Social Sciences.

The country's CPI is widely expected to take a steady but mild upward curve in the long term, instead of rising sharply within a short period. Hence, too much worry over the mildly rising CPI is unwarranted, he says, because it's likely to subside after an adjustment in the food market is complete.

The less privileged will be hoping that to happen sooner than later.