It's price controls to fight supermarket inflation, China's Premier Wen promises in Mongolian supermarket

01/05/2011 3:16 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com



It’s an odd ritual. Something like Groundhog Day in Punxsutawney without the groundhog.

At the start of the calendar year China’s Premier Wen Jiabao visits a remote corner of China, mingles with the crowds, and delivers a major message about the coming year.

This year Wen visited a supermarket in Inner Mongolia. The message? The government will make “stabilizing the prices of food and other necessities a higher priority.”

Not a bad message when you’re leading a country where general price inflation hit an annual rate of 5.1% in November (up from 4.4% in October) and where food inflation roared ahead at an 11.7% rate that same month. Food makes up about one-third of China’s consumer price index and accounts for about 50% of the budget of the country’s poorer families.

Wen is facing a tough sell this year. (Not to mention that it was a negative 25 Celsius in Mongolia during his visit.) Cynicism about the government’s willingness to fight inflation—and sacrifice a bit of economic growth—is on the rise after Beijing announced that it would raise the inflation target for 2011 to 4%. The South China Morning Post reported today that Internet users in China recently picked the character “zhang,” which means, according to the paper, “price rise” or “inflation” as the word of the year.

But China’s leaders remember that runaway inflation in the late 1980s contributed to the popular dissatisfaction that culminated in the 1989 Tiananmen Square protests and their violent suppression. As Wen’s trip this year demonstrates, Beijing isn’t exactly ignoring the problem.

All the signs are that the government is trying to have its economic growth and control inflation too. To that end policy is tilting heavily toward price controls and measures to increase supply with a light dressing of the monetary and macroeconomic moves—a pinch of interest rate increases to season a new loan quota unchanged from 2010, for example—that doesn’t threaten to slow the economy.

Economists think that Wen and the rest of China’s leaders could catch a break in December and January when easier year-to-year price comparisons are likely to push the annual inflation rate back below 5% to 4.5% to 4.8%. But, studying the data, those same economists point to year-to-year comparisons that could send the inflation rate headed to double-digit territory about half way through 2011.

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