China's consumer price index (CPI) rose 3.8 percent year-on-year during the January-July period this year, the highest since 1997, putting the Chinese government on inflation alert.

Last year saw the end of a 14-month downslide of China's CPI. The index has risen with growth rates over 1 percent since the third quarter last year.

The rise in prices of grain and other farm produce last September and October drove an overall hike of food prices. It was later followed by price surges of coal, electricity, oil, steel and other capital goods.

In the first seven months this year, the retail price level increased 2.6 percent, while the industrial capital goods price level jumped 14 percent, also the highest since 1997, arousing great attention from the public.

Though the markets continue to remain calm, the rapid CPI increase is causing difficulties in poor families' daily lives, and showing its pressure on catering, auto-making, electrical household appliance manufacturing and clothing.

The Chinese government, regarding price control as a tough job, is taking the matter seriously. It has tried to stabilize grain prices, although a price increase in farm produce is good news to farmers who have suffered low sales prices and creeping income growth for a long time.

China's grain price surge has mainly been caused by years of continued grain output decline. Grain output dipped from a record high of 512 million tons in 1998 to 435 million tons in 2003.

The government considers the increase of grain output as the most effective solution to the price problem. The retail price should not go too high, while a minimum price should still be ensured to protect farmers' interests, sector insiders said.

The 4.8 percent increase in China's summer wheat output this year put an end to the four-year summer grain decline, stabilizing the grain price level.

The government considers curbing rising prices of capital goods to be a priority to prevent inflation, since the price jump in these sectors may later trigger price rises of downstream products.

The State Development and Reform Commission asked local governments in March to curb the rising price of fertilizer. The profit rate for fertilizer wholesale businesses cannot exceed 3 percent in northeast China's Heilongjiang Province, 4 percent in central China's Henan Province, and 2 percent in central China's Hunan Province.

The China Banking Regulatory Commission (CBRC), the country's banking watchdog, ordered State-owned banks to control the amount of loans for overheated iron and steel sectors. The price of steel products for construction projects dropped considerably in April and May thanks to tightened money supply and timely administrative intervention.

The government has tightened macro-economic control to curb other overheated investment in cement, electrolytic aluminum and electric power, which helps reduce the prices of materials and equipment needed in these industries.

During the first seven months this year, the price level for clothing dropped 1.4 percent year on year, and that for household appliances and services as well as transportation and telecommunication services dropped 1.6 percent, according to government statistics.

(Xinhua News Agency August 17, 2004)