Food prices, inflation and policy responses: The case of China

Abstract

The continuing increases of China’s consumer prices since the middle of 2007, which have mainly been driven by increases in the prices of food, have triggered serious concerns both in China and abroad. In China, some people fear that a surge of inflation is looming over the nation’s future. Pessimists even predict that these rising prices are a sign that the economy is in a state of fundamental distress. To ease the mounting pressures that have accompanied the price rises—and to avoid the damage that inflation could bring to China’s economy, officials have begun to use a spectrum of policy measures—including monetary policy adjustments, fiscal moves, and even direct attempts to intervene into the market price of food (by dumping stocks into the market; attempting to strong-arm companies into not raising prices; and trying to interrupt international trade). Since the previous policy suggestions have been raised by those who hold different opinions, some of them are even mutually contradictory. To find the correct way to address the fundamental problems facing China, a clear understanding is needed of: a.) the nature of the price rise; b.) the sources of the recent rises; and c.) an evidence-based judgment on the expected future direction of the price changes and their impacts.