News that food costs are still rising came as little surprise to the long lines of Beijing residents hunting supermarket bargains ahead of China's biggest holiday season.
China said Thursday that overall inflation dipped to 4.1 per cent in December, the fifth consecutive month of decline. But food prices spiked to 9.1 per cent, up from November's 8.8 per cent.
The inflation rate for 2011 over all sat at 5.4 per cent, well above the government target of 4 per cent, but it wasn't enough to deter shoppers readying for the Chinese New Year.
"Yes, food is expensive now. But we still need to eat," said Ma Decheng, 67, a retiree sorting through a table of green beans at an eastern Beijing market Thursday ahead of the holiday celebrations.
As the Year of the Rabbit turns into the Year of the Dragon, some 3.1 billion journeys are expected by bus, train, plane and car as most Chinese return to their hometowns in time for the holiday, which begins Monday.
Once the celebratory firecrackers subside, inflation is expected to slow, giving Chinese policy makers the green light to ease up on measures designed to rein in prices, and to focus again on ensuring GDP growth continues amid fears of another global slowdown.
"Looking into 2012, inflation should no longer be a key policy concern, due to normalizing credit expansion, a moderating GDP growth rate, softening global commodities prices, and the continued delivery of supply-side measures designed to stabilize food prices," wrote Qu Hongbin, co-head of Asian economics research at HSBC, who predicts 2.9-per-cent inflation in 2012.
That number is too optimistic for some economists, who say Beijing's renewed focus on growth may leave inflation in the 3-per-cent to 4-per-cent range this year.
"If we still have a neutral monetary policy, there is a chance that this slowdown process may not be able to bring inflation down to the 3-per-cent range as expected," said Mei Jianping, an economics professor at Cheung Kong Graduate School of Business in Beijing.
At stake is ensuring gross domestic product growth of at least 8 per cent in the world's second-largest economy – widely seen here as required to ward off high levels of unemployment that would result in unrest – while not feeding the problems that come with too much government spending.
Although Chinese authorities have spoken often of the need to make economic growth less reliant on exports by encouraging more spending at home, they have also traditionally relied heavily on investment-driven growth such as building railways and skyscrapers to fill in GDP numbers if exports are falling.
But those measures have also driven inflation and created a crisis of bad loans, including ones taken out by property developers who have seen the real estate market collapse under new, strict government regulation of ownership.
For now, most economists are predicting a slow and gentle easing of policies that were aimed at tackling inflation, including lowering the reserve requirements for banks.
"Lower headline inflation should provide officials with greater scope to ease policy if required in the months ahead. In the near term, however, it seems that a full-scale reversal in policy settings is not on the agenda," Brian Jackson, of the Royal Bank of Canada in Hong Kong, wrote in a note to clients. "Having worked hard to get inflation under control, Beijing will be reluctant to ease policy too quickly or too aggressively and risk a reversal in the recent downward trend."
Coming next week is the government's announcement on 2011 GDP growth; various economists, including those at the World Bank, have predicted it will come in at 9.2 per cent to 9.4 per cent.
Special to The Globe and Mail