Rising food prices test Chinese consumers

China's more open market, economists say, makes food vulnerable to global prices.

Mrs. Wang stood by the shelves of cooking oil in one of Beijing's biggest supermarkets, inspecting the price stickers carefully.

A retired factory worker on a modest pension, Wang, who gave only one name, used to be able to buy her favorite brand of oil, a key ingredient in Chinese cuisine. "Today I buy whichever brand is cheap," she says. "We are feeling the pinch of rising food prices. We don't live as well as before."

Food prices, 17.6 percent higher than a year ago, have pushed China's consumer price index up faster than it has risen for a decade, official figures released this week showed.

And Wang's woes matter to more people than just her family. In a country where growing prosperity is the government's central promise to its people, the authorities cannot afford to let inflation get out of control for fear of social discontent.

Consumer prices were up 6.5 percent in October from the same time last year, China's national Statistics Bureau announced Tuesday.

The spike equaled August's rate, the highest it had been for 11 years. The Central Bank had hoped to cap inflation at 3 percent this year. The top inflationary culprits were food items, led by the staple meat here, pork, whose price has skyrocketed 54.9 percent over the past 12 months because of shortages. Poultry was up 38.3 percent, cooking oil up 34 percent, and vegetables up 29.9 percent.

Those figures took on special drama last weekend, when three shoppers at a supermarket in the central Chinese city of Chongqing were killed in the crush as customers fought for bottles of oil on special offer.

The limited-time 20 percent discount, celebrating the Carrefour supermarket's 10th anniversary, saved $1.53 a bottle.

That is no mean sum to millions of poor Chinese, however, as Prime Minister Wen Jiabao acknowledged Monday during a heavily publicized visit to a low-income neighborhood in Beijing that illustrated the extent of the government's concern with inflation.

"Prices have been on the rise these days, and I'm aware that even a one yuan ($0.135) increase will affect people's lives," Mr. Wen said. He urged employers to raise workers' wages and to respect minimum wage laws. [Editor's note: The exchange rate was incorrect in the original version.]

Inflation and unrest

Officials have not forgotten that one of the factors behind the Tiananmen Square student protests in 1989, which ended in a massacre, was high inflation. Nor can it have escaped their attention that sudden rises in the price of fuel have triggered unrest recently in Burma, Nepal, and Indonesia.

"Many of us wonder why this is happening and who is going to fix the problem," says Fang Xing, who owns a noodle shop in Shanghai's Luwan district. "In my opinion the government … is more concerned with making sure it does not look corrupt than with tackling the economic problems most of us face."

For the time being, though, most shoppers seem resigned to rising prices, and expect them to continue rising.

"Costs have gone up, but there is nothing we can do about it," says Guo Junquan, a driver in Beijing. "My family still eats meat, we just pay more for it."

Open economy, vulnerable food prices

Economists say that food prices are unlikely to come down any time soon.

"Given the cycles of agricultural production, prices will be quite high for some time, but I do not expect any great increase over the long term," Zhu Zhixin, vice director of the National Development and Reform Commission, said recently.

China can do little about one of the major drivers of prices at home – prices on the international markets. Though the country produces most of the food it consumes, "its agricultural markets have become more open since it joined the World Trade Organization, so the prices of many food items are influenced by international prices," explains Louis Kuijs, a World Bank economist.

At bottom, government policymakers say, they discern no fundamental problems and no serious imbalance between supply and demand in key economic sectors. They point out that though prices over the first nine months of 2007 are up 4.1 percent on the same period a year ago, 3.5 percent of this was accounted for by food items.

When foodstuffs and oil are stripped out of the October monthly inflation figures, "core inflation" was just 1.1 percent.

But officials say they are concerned about the speed of China's economic growth, expected to top 11 percent this year.

"We have to understand … the danger and possibility of a fast-growing economy becoming overheated and inflationary," said Mr. Zhu. "We need to adopt timely measures to address new problems."

China's central bank has raised interest rates five times this year, and is expected to do so again in the next few days, but the moves have so far had little impact.

In September, the government slapped a price-freeze on cooking oil and other staples, on airline tickets, and on electricity prices among other items.

Two weeks ago, however, it raised state-set fuel prices by 10 percent, responding to the increase in world oil prices. That move is likely to be reflected in November's inflation figures.

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What's at issue:

• The Food and Agriculture Organization reports that food and feed commodity prices rose 37 percent in the past year.

Why it's happening:

• Higher petroleum prices have increased costs of production, processing, and transportation.

• Freight rates for bulk commodities are up 80 percent in the past year.

• Volatile exchange rates. The historically-low US dollar has increased demand for imports from the US, driving up prices both domestically and abroad. Also, as most commodities are traded in US dollars, the weaker dollar has pushed US export prices higher, especially for wheat.

• Drought in Australia and supply problems in other parts of the world.

• Higher feed prices have also driven up the price for livestock, particularly poultry, which is up at least 10 percent higher than the previous year.

Source: UN Food and Agriculture Organization www.fao.org

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