A jump in consumer inflation by 8.7 percent last month, the biggest in nearly 12 years, should galvanize Chinese policymakers into another round of tightening measures.

It has become quite clear that the inflation figures for the first two months of the year will make it difficult for the government to keep the full-year inflation rate under its target of 4.8 percent.

The figure, compared with 7.1 percent in January, is well above almost all market expectations. Though observers have factored in the Lunar New Year holidays and the severest winter storm in half a century that hit central and southern China, few seemed to have grasped the full impact of these events on price gains.

Food prices surged 23.3 percent in February, with pork prices up 63.4 percent and vegetable prices up 46 percent year on year.

Because food prices make up one-third of the consumer price index, a bigger share in the household budgets of low-income families, such food-led inflation, bites the poor much harder than the rich.

To prevent the meager purchasing power of low-income households from being further undermined by rise in food prices, the authorities should come up with either a generous food subsidy or a sharp rise in interest rates.

It is a complex task to identify all the people in real need of food subsidy in the absence of an all-inclusive national social security system. But it is worth carrying out the task now while the country is gradually expanding its social security network.

Adjustment of interest rates is surely a subject for debate.

The combination of interest rate increases, and weakening external demand as a sharp drop in trade surplus last month illustrated, may indeed trigger an economic slowdown more drastic than expected.

Nevertheless, the authorities should also keep in mind that, while deposit interest rates remain negative and lending rates fall rapidly against price gains, the monetary policy can never be tight enough to fight runaway inflation.

Some optimists believe that the jump in consumer inflation in February represents the peak of the cycle. It is possible that consumer inflation may start easing this month as supply shocks caused by winter storms are reduced. But the slow and steady rise of non-food prices, a check on the current price gains, tends to fuel more inflation.

Non-food prices edged up only 1.6 percent last month from a year earlier. Yet, as producer-price inflation accelerated to 6.6 percent, the fastest pace in more than three years in February, pressure for consumer prices to rise is mounting.

(China Daily, March 12, 2008)