Managing inflation expectations smartly

The need to manage inflation expectations as proposed by the State Council, the country's cabinet, suggests that the decision-makers have developed a forward view on the risks of potential inflation, which is a timely and helpful move.

To manage inflation expectations, the government should regulate the controllable factors in advance and appropriately guide market views on the trend of these factors, including expectations on domestic monetary policy (especially money supply growth and real interest rate), fiscal policy, the government's intervention in the stock and housing markets, land supply and policies affecting global liquidity conditions. First, the current year-on-year growth rate of M2 surpassed nominal GDP growth rate in the first three quarters by 23 percentage points and credit growth, by 27 percentage points, signaling obvious excessive liquidity.

Though the overcapacity of manufacturing and bumper harvests could partly constrain prices of some industrial and agricultural products, consumers cannot believe that excessive liquidity (currency) would not purchase goods or property, given the unprecedented monetary credit growth. Excess liquidity is the major cause of inflation expectations. Since the growth rate of M2 and credit is controllable, if it could be steadily slowed down in the future, inflation expectations can be restrained.