China yesterday reported that in February consumer prices rose 8.7%, year over year, up from the already high 7.1% rise in January. It appears that the focus on inflation at this year's National People's Congress meeting is well justified. The government has forecasted full year inflation of 4.8%, so to achieve this inflation target rates must drop through the remainder of the year.
Controlling inflation, however, is complicated by the fact that recent inflation has been concentrated in the food sector. For February, food prices were up 23%, while non-food prices were up just 1.6%. So, it’s pretty clear that the problem is in food prices. For a more detailed discussion on food price inflation in China, and how it is different than asset price inflation, please see this article.
Targeting just food prices may be difficult for China using macroeconomic controls, such as higher interest rates or higher bank required reserve ratios. In addition, tighter macroeconomic policy risks the potential for unduly harming overall economic growth without targeting the real reasons for food price inflation. China is attempting now to use temporary food price controls on some items to restrain food price hikes. However, over the medium to long term, it appears that getting food price inflation under control must involve increased supply. Perhaps better use of technology, more efficient farming techniques and better use of arable land can all play a role. Changes to long-term food supply, however, may take time and this time factor is where the real risks lay.