Tuesday, February 28, 2012

2012 CPI (Consumer Price Index) Target

We, Mr China, decide that our own China CPI (Consumer Price Index) target should be set at +4.5% in the year 2012.

Similar to past year, our independent inflation expert team has forecasted the 2012 fair values of different consumer-price correlated categories and then put them into the CPI formula. According to our calculations, domestic CPI will increase by +4.5% in 2012. This calculated target can also be considered as an extension to our CPI target last year since we expect inflation pressure shall continue to ease in 2012. It just happened that the rate of CPI drop in 2011 was not as fast as than we originally expected, mainly due to the delayed action of PBoC (People's Bank of China) interest rate cuts. In 2011 (full year), China CPI (Consumer Price Index) raised by +5.4% YoY, higher than our original target of +4.5% YoY.

Basic assumptions for inflation in 2012 are:

(a) Inflation pressure will continue to ease as China PPI (Producer Price Index) started to drop sharply from over +5% to +2.7% YoY in November 2011. The price drop in producer level should induce a price drop in consumer level as well.

(b) Inflation pressure will only ease slowly as monetary easing is still a key policy in developed countries. In the U.S., Federal Reserve already announced on January 25, 2012 to extend its interest rate freezing period from mid-2013 to late-2014, and also historically set an inflation objective at +2% YoY level. Such an inflation objective gives the U.S. Federal Reserve an easy excuse to pump additional liquidity to open market just if the U.S. CPI trends to fall below +2% YoY. This makes the QE3 (3rd round of Quantitative Easing) much more possible within this year especially 2012 is a year of U.S. presidential election and the Obama administration is likely to seek for a better employment figure by temporarily ignoring the risk of future inflation expectation. In addition, owing to the weak domestic demands, it is expected that other developed countries like Japan, U.K. and even Europe will continue to execute the similar quantitative easing policy in 2012. In particular, it seems Europe will continue to work on its own style of QE through LTRO (Longer-term Refinancing Operation). Just like what happened after the first round of quantitative easing since early 2009, these monetary easing policies in developed world will push up global commodity prices, and will then surely drive up inflation as well as inflation expectation in developing countries like China and India etc.

China inflation graph by CPI

Current CPI Chart for China

The +4.5% increase is our first release value of China CPI (Consumer Price Index) target in 2012. Such forecast is quite a complicated process and is mainly based on our economic assumptions (see above). We use those 2012 economic assumptions for projecting our CPI calculations carefully and then come up with our annual inflation target here. However, there are real chances that our assumptions may be partially deviated or may even become invalid once any major 2012 economic projection should change. Therefore, for your best interest, we may reconsider amendment or make necessary revision for upgrading/downgrading our CPI target later shall the related 2012 inflation environment may change.

More Article(s) about China Targets:
Table of All Our Published Targets for China


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