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Inflation continues to plague China's economy

Consumer prices in China rose 4.9% in January compared with the same month a year ago, even with reduced emphasis on volatile food prices.

February 15, 2011|By David Pierson, Los Angeles Times

Reporting from Beijing — Consumer prices in China rose 4.9% in January compared with the same month a year ago, a sign that inflation continues to plague the world's second-largest economy.

That increase was lower than some analysts had expected. Still, the figures are difficult to interpret because China's National Bureau of Statistics recalibrated the index recently to give less weight to food prices, which tend to be volatile.

China's inflation rate is widely believed to be understated. The government's tinkering with the consumer price index comes at a time when authorities are particularly concerned about the rising cost of food, which has an outsized effect on the budgets of ordinary Chinese. Shoppers are fuming over soaring costs for vegetables, cooking oil and other staples.

Still, it's not uncommon for governments to adjust how they calculate inflation to better reflect how households are spending their money. When China's economic reforms kicked off 33 years ago, urban residents spent about 60% of their household income on food. Today, that share has plummeted to 36%.

In the United States, grocery expenses take up about 12% of household income, and food prices account for less than a tenth of the U.S. consumer price index.

"In the past, the share of food in China's consumer price index was too much," said Hu Xingdou, an economist at the Beijing Institute of Technology. "People are spending less and less on food as a total percentage of their income. What they should really do [to calculate a more accurate Chinese CPI] is increase the share of living expenses like gas, water and housing."

Residential rental prices and utilities were weighted more heavily in January's inflation announcement. But to truly reflect China's rising cost of living, Hu said, bureaucrats should include soaring home prices, which have become a major burden for millions of Chinese.

China's central bank has raised interest rates three times since October in a bid to tame inflation. But few economists believe the country will meet the government's 4% target for the entire year, not when the money supply has grown more than 50% since 2009 and the worst drought conditions in China in 60 years have been ravaging crops.

"There is still clearly far too much liquidity in the system," said Alistair Thornton, an analyst for IHS Global Insight, adding that $158 billion in new bank loans in January "makes a mockery of the government's tightening rhetoric."

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