Tuesday, October 26, 2010

2011 CPI Target

We, Mr China, release our own China CPI (Consumer Price Index) target as +3.5% in the year 2011.

Our independent inflation expert team put estimated fair values of these weighted categories into the formula and, by our calculations, the domestic CPI will climb up by +3.5% in 2011.

Although the Chinese government already sets her CPI upper limit as +3% annually, our calculated target indicates that this upper limit will no longer be met in 2011. The main reasons are:

(1) the weak USD dollar pushes up the prices of global commodities and hence increases the inflation pressure in China.

(2) the delayed action of the Chinese central bank who decided not to increase any interest rate against inflation before 19 October 2010. Here in real China, even normal people could start to feel the pressure of inflation since early 2010.

China CPI chart

Current China CPI Chart

This situation was, however, already reflected in CPI figure which started to go over +3% YoY in mid 2010 but the Chinese central bank still delayed until 19 October 2010 to increase the domestic interest rates by 0.25%. Before that, the China interest rates have not been raised for almost 3 years.

Our +3.5% YoY of CPI target assumes that we have enough confidence the Chinese central bank, PBoC (People's Bank of China), will to do some prompt corrections to minimize the impacts for its delayed action, thus avoiding a too high level of inflation and inflation expectation afterwards. Of course, this assumption for CPI target is not permanent and is not something that can never be changed. In fact, the policy of PBoC (People's Bank of China) can vary from time to time, especially during the volatile global economic environment nowadays. It is also believed that PBoC (People's Bank of China) must react to the policy change(s) of other major central banks across the globe, say if the U.S. Federal Reserve further expands its quantitative easing program later or somehow considers to start withdrawing the excessive liquidity from the monetary market. Such external policy change(s) of other major central banks worldwide can then affect the inflation environment in China seriously and hence the domestic CPI data accordingly. As a result, our assumption for CPI target is valid if and only if the current inflation environment remains.

The increase of +3.5% is of course our initial release value of China CPI target in 2011, it may be upgraded or downgraded later if the related inflation conditions may change.

UPDATE - our 2011 China CPI target has been updated, please refer to our latest article: Why PBoC Prefers Reserve Requirement Ratio (RRR) Hikes for detailed reasons.

Related article(s):
2011 GDP target
2011 Trade Balance target
2011 Shanghai SSE Composite Index target
2011 HK HSI Hang Seng Index target
Setting our own targets


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