By Xin Zhiming (China Daily)
Updated: 2007-07-10 09:11

The consumer price index (CPI) this year may exceed 3 percent, the warning line set by the central bank, according to the National Development and Reform Commission (NDRC).

The index is expected to reach 3 percent in the first half of this year, said a People's Daily report, citing an unidentified NDRC price department official.

The central bank's research department previously said the CPI would grow by 3.2 percent this year.

While economists have generally forecast that the index would rise steadily this year, many said the trend would taper off later this year, rebalancing the rate for the whole year.

Related readings: M2 growth underestimates inflation pressure Nation advised to curb assets prices via cost controls Pork price rise alone won't affect CPI much: Economists PBOC: Financial stability enhanced

In the first five months of the year, the CPI rose 2.9 percent. But in May, it rose 3.4 percent, the highest in more than two years.

The NDRC official said the growth was driven by the fluctuations in international grain prices.

The growth of the biofuel industry in major developed countries, which has pushed up demand for corn and soy, has led to sharp rises in grain prices in the international market.

These price rises have, in turn, spilled over into the domestic market, affecting the costs of eggs, meat, poultry, milk and edible oils, the official said.

Rising costs in the animal husbandry sector are another factor behind the grain price rises, he added.

Pork prices, which are estimated to account for 7 percent of the CPI basket, surged in the first half due to tight supply, with the blue ear disease causing mass culling of pigs, the official said.

The price of pork has continued to soar in the second half, climbing as high as 20 yuan ($2.60) per kg last week in some local markets, about 30 percent higher than just a few months ago.

Despite the pork price rises, Hu Shaowei, an economist from the State Information Center, told China Daily that food prices, which account for about one third of the CPI basket, may not be the ultimate force that will decide the CPI trend for the whole year.

The prices of many products other than grain have dropped, which will ease CPI pressure.

According to the NDRC, prices of vegetables dropped from May 21 to June 20. Those of production materials have also declined.

Song Guoqing, an economist with Peking University's China Center for Economic Research, said the index would go down sharply later this year, pulling the CPI below the 3 percent mark for the whole year.

Zhuang Jian, an economist with the Asian Development Bank, said the situation may not be as serious as it looks.

"Core inflation is not so high and has remained stable," he told China Daily.

Core inflation, which excludes such short-term factors as highly volatile oil and grain prices, reflects the longer-term price trend of a country.