"Managing inflation expectations" doesn't necessarily mean inflation on the way

A key point of China's macro-regulation for the rest of the year would be to balance the tasks of ensuring stable and relatively fast economic growth, adjusting economic structure and managing inflation expectations, according to a statement released after a State Council executive meeting, which was chaired by Premier Wen Jiabao, on October 21. It is the first time this year that China stresses managing inflation expectations.

Loose economic policies and rebounding prices create inflation expectation

In the first three quarters of 2009, China's CPI and PPI are much lower compared with the same period last year, indicating that there is no inflation. However, some people have rising inflation expectations.

Liu Guoguang, an economist with Chinese Academy of Social Sciences (CASS), pointed out that China usually saw inflation when its economic growth rate was higher than the potential economic growth rate. Currently, the country's potential economic growth rate is around 8 to 9 percent, higher than China's GDP growth rate in the first three quarters and in the third quarter.

With China's stabilizing economy and rebounding consumer prices, CPI may start to increase at the end of 2009. "It is quite normal that inflation expectations are rising," Liu said.

Loose macro economic policies were the fundamental cause for current inflation expectations, noted Ding Zhijie, a professor with the University of International Business and Economics.

To tackle crisis, countries around the world carried out unprecedented stimulus packages and many economies have implemented loose monetary policies. The market is worrying that high liquidity may turn to actual demand. This has finally resulted in inflation expectations, explained Ding.

China's moderately loose monetary policy succeeded in stabilizing the economy. Meanwhile, huge new loans and rapidly expanding money supply brings anxieties over possible inflation, he added.

No worry, as long as there is proper macro economic control

Although managing inflation expectations was discussed in a State Council executive meeting, it doesn't mean that inflation would appear right away or that the possible inflation is rampant, Liu said.

He analyzed that factors pushing and dragging down consumer prices both exist. Recovery of China's economy, rising commodity prices in the world market, influence of rapid credit expansion, hot money influx and uncertainty in food prices may lead to consumer price hikes. However, weak recovery of overseas demand and overcapacity will help to hinder price rises.

According to predictions by the Development Research Center of the State Council, China's GDP will grow by 8.2 percent in 2009 and 9.1 percent in 2010 if expansionary fiscal policy remains. Consumer price can be controlled to lower than 3 percent, and consumer price growth may reach 3 to 5 percent in Q4 2010, only mild inflation.