Inflation expected to rise next year, warns think tank

Inflation in China will quicken next year as food prices, wages and rents increase, a central government think tank said on Monday.

The Price Monitoring Center, a research institute under the top economic planning body, the National Development and Reform Commission, forecast that the consumer price index will rise more than 3 percent next year.

It also estimated that the CPI will show an increase of 3.2 percent in the fourth quarter of this year.

The CPI jumped unexpectedly in October, increasing 3.2 percent after several months of moderate gains.

In the first 10 months of the year, the CPI was up 2.6 percent, well below the government's target of 3.5 percent.

The center forecast that food prices will continue to show upward momentum this year and lift the overall inflation level by 0.2 to 0.5 percentage point.

Although the nation's harvests might be favorable, providing a good base for food price stabilization, other factors are likely to keep food costs rising. Those factors include higher pesticide costs, more demand for irrigation and rising agricultural wages.

The CPI will also be driven up as the producer price index, which shows costs at the wholesale level, declines more slowly or even rises, the center said.

A booming property market will drive up rents and housing-related material costs, and that will eventually translate into higher household spending on real estate.

This factor could raise the inflation rate by 0.1 to 0.3 percentage point.

Unlike consumer price indexes in mature economies, in China, food costs represent the bulk of the indicator. Accommodation expenses take a much smaller piece of the household spending pie.

Another CPI forecast, based on Bloomberg News' survey of economists, sees momentum for an upswing in China's inflation.

But its forecast is higher than the NDRC's, putting the number for 2014 at 3.2 percent. It estimated a 3.2 percent rise in the fourth quarter of this year.

Another report, released on Monday by the State Information Center, also affiliated with the NDRC, put next year's CPI gain at 3.2 percent. It forecast that average housing prices nationwide will rise another 5 percent next year.

Tang Jianwei, a senior researcher with the financial research center at Bank of Communications Ltd, said experience indicates that China's CPI has entered an upward cycle that could last for two years.

The highest point in this cycle could occur next year, Tang said.

"The upward pressure for inflation next year will be a bit higher than this year, and next year's high point could be more than 3.2 percent," he said.

With prices apparently set to rise, the NDRC offered several suggestions.

The report said that the government should rein in "unreasonable" property price hikes and expand the trial program for property taxes.

The agency, while admitting that the pilot tax program hadn't had much impact on property prices in the cities involved, urged that the tax be extended beyond newly bought housing to all residences, new or old.

The tax rate should also be raised, it said.

The report urged the establishment of a system to disclose civil servants' assets, in an effort to rein in housing-related corruption.

In response to calls for liberalizing energy prices — specifically oil, natural gas and electricity — the report cautioned that reforms should proceed in line with actual circumstances.

The report called for minimizing the spillover of higher prices by levying special dividends on the producers of those commodities. Those levies should be used for subsidies to consumers, it said.

An announcement after last month's Third Plenum of the 18th Central Committee of the Communist Party of China promised to liberalize oil, natural gas and electricity prices, which fueled the expectation that prices would soar once controls are eased.