China consumer inflation hits 10-month

high
As consumer price index shows rise of 3.2pc, moves to cool economy look likely
Sunday, 10 March, 2013 [UPDATED: 08:56]
Jane Cai in Beijingxuejun.cai@scmp.com

China's consumer inflation climbed to a 10-month high last month and fixed-asset
investment boomed, prompting expectations that monetary tightening may be needed in
the second half of the year to cool the economy.
The consumer price index (CPI) rose 3.2 per cent last month from a year ago, pushed up
by higher food prices during the Lunar New Year festival, the National Bureau of
Statistics said yesterday. Consumer prices in February were 1.1 per cent higher than
January. The official inflation target is 3.5 per cent this year.
"Even factoring in the distortion of the holiday, which fell in January in 2011, the CPI level
is high," Renmin University finance professor Zhao Xijun said. "Inflation pressure will
mount down the road as companies pass higher labour and environmental costs onto
consumers while loose monetary policies in major countries will result in excessive
liqudity."
Inflation pressure is piling up as a result of China's robust growth in what Beijing calls
total social financing - which covers bank loans, trust loans, and issues of bonds and
equity - and quantitative easing in the United States and Japan.
Qian Yingyi, a member of the Monetary Policy Committee of the People's Bank of China,
said last week the central bank "may take action to prevent boom-and-bust cycles" to
combat inflation.
Industrial output in January and February expanded 9.9 per cent from a year earlier,
below market expectations of 10.6 per cent. Power generation growth slowed to 3.4 per
cent in the two-month period from 7.6 per cent in December.
Lu Ting, an economist at Bank of America Merrill Lynch, said: "There might be some
temporary destocking due to the cold winter, so we might see a nice rebound in industrial
output and power growth in March."
Retail sales growth fell to 12.3 per cent year-on-year in the January to February period,
from 15.2 per cent in December. Lu attributed this to the government's recent campaign
against extravagance and conspicuous consumption, such as officials splurging on
wining and dining.
Fixed-asset investment growth accelerated to 21.2 per cent year-on-year in the first two
months, with investment in the real estate sector rising 22.8 per cent as developers
rushed to benefit from the market rebound.
Qu Hongbin, an economist at HSBC, said expectations of higher property prices would
be the biggest inflation risk this year, as buyers' anticipation would push prices higher
following the strong rally that began in the second half of last year.
Criterion A Diagrams
- Keynesian Model and Classical Model with inflationary gap
- Using Monetary Policy to shift the AD to the left
- Resulting with a lower price level
- Thus inflation gap solved
- High price level(inflation) solved

Criterion B Terminology
Define
- GDP
- Aggregate Demand
- Aggregate Supply
- Long Run Aggregate Demand
- Monetary Policy
- Inflationary gap
- Inflation
- Consumer Price Index

Criterion C Application
Problem stated:
- Chinas consumer inflation rise to 3.2% which is 10-month high
- Peoples income cannot chase up with the rise in goods and services
- People cannot afford to buy goods, even the necessities
- Inflation problem seriously affect society, affect social order
- Economically able people cannot work efficiently thereby hindering the
economy
Suggested Solution:
- Using monetary policy to reduce economy liquidity
- Increase interest rate, not to encourage people to spend
- Oppositely, to encourage people to save money in the bank

Criterion D Analysis
- Inflationary gap is presence
- Serious inflation(high price level)
- By using the monetary policy, decrease the supply of money
- Increase the interest rate
- Aggregate Demand drops(shift to the left)
- Equilibrium forms at the intersection between the New AD and AS
- Resulting with a lower Real GDP and also a lower price level
- Inflationary gap solved, price level drops which means inflation is lessened

Criterion E Evaluation
Strengths
- Fast to carry out
- No politics
Weakness
- Hard to measure the gap
- Takes time to identify
- Inadequate information