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Root Causes of Continuous Price Decline And Policy
Table 1 Main Price Changes in January-May 2002 (%)
Month Jan Feb Mar Apr May Consumer prices nationwide Over a year earlier -1.0 0.0 -0.8 -1.3-1.1 Over preceding month 0.3 1.1 -1.3 -0.3 Accumulated -1.0 -0.5 -0.6 -0.7-0.8 Producer prices of industrial products Over a year earlier -4.2 -4.2 -4.0 -3.1 Prices of capital goods Over a year earlier -5.0 -4.7 -4.5 -3.4 Import prices of raw materials Over a year earlier -4.8 -4.6 -4.7 -3.8
(2) Direct causes of price declines
1. The price-pulling factors have weakened. In recent years, the government adjustment of the prices for some commodities and services has been the main force pulling up the prices. In 2001, for example, some regions raised the tuition fees, housing rent, the price of water for civilian use and other charges, thus forced the price indexes for the category of education, culture and entertainment and for the category of housing to rise by 6.6 percent and 1.2 percent respectively over the same period of the year before. In 2002, the central and local governments at various levels strengthened the regulation and control over the prices of the monopoly commodities and services, and improved the government pricing mechanism. As a result, policy-oriented price adjustments covered less items and the government ability to raise prices was weakened. At the same time, personal housing rents reduced after the housing reform, and the interest rate of housing loans was lower. From January to April, the prices of the above two items rose by 0.6 percent and 0.2 percent over the same period of last year, with their range of price rise being respectively 6.0 and 1.0 percentage points lower. Obviously, their ability to pull prices up has weakened.
2. The price-stabilizing factors have undergone changes. In 2001, grain prices began a recovery rise of 1.5 percent (national retail price index), thus bringing an end to the continuous decline of food prices in the preceding four years. Food prices in 2001 were at the same level of the previous year. That was the main factor for stabilizing the price level. In 2002, however, grain export in the first two months dropped by 10.7 percent while grain import increased by 79.1 percent due to the impact of China''s accession into the WTO. Because of the impact by imported low-priced grains and the improvement in grain production, grain prices began declining. The decline during the January-April period was 1.5 percent (consumer prices in 36 large cities). As a result , food prices dropped by 1.0 percent. This was due to the changes in the price-stabilizing factors.
3. The price-declining factors increased and all consumer prices declined. Technological advance has lowered the costs of cultural, educational and communication products and forced down their prices. Sustained market oversupply deepened the declining range of the prices of industrial and consumer products. After the WTO accession, the impact of imported products on the domestic market also restrained the prices.
4. The rapid growth of supply restrained a rebound in the prices of capital goods. Thanks to the rapid increase in fixed asset investment and industrial production, the rising demand for capital goods brought the prices of capital goods slightly up. As a result, the price declining range is small. Beginning from February,
