Chinese count the cost of rising prices as inflation bites

Today's announcement of the first-quarter's consumer prices index will not have been news to her or indeed most people in China. Rising prices are an increasingly difficult feature of life, particularly for the elderly and the lower-income families.

Statistics can be pretty dry at the best of times. But the Chinese economy is under pressure and the quarterly figures are of more than passing interest to most.

The big number to watch is the CPI, the measure of inflation. This is the figure that is guiding government policy. The year-on-year rate for March was 5.4%, some way above the official target. The quarterly rate was 5% up but, more interestingly, there was a slight fall in prices between March and February.

Initial reactions seem positive, with polite murmurings about the government's approach, and imported raw material inflation gets the bogeyman prize. It's underlined by producer prices showing a quarterly increase of 7.1%.

Last week, the petrol price rose by some 5%. This price is controlled by the government, set by an obscure formula and it was probably less than world prices might have indicated.

One unexpected consequence has been an upsurge in Chinese media interest in the Middle East. The upheavals there had been rather played down so far. Now everyone is really interested in what is happening in Libya.

However, the CPI shows another picture. The quarter's big risers were food (11%), housing (6.5%) and healthcare (3.1%), the most important expenditure items for households.

Food is a major social and psychological item in China. Many can still remember the shortages of the Mao era. So double-digit food inflation hits deep. Blame international prices, water shortages, evil speculators or just the fact people expect more and can afford to buy more. They all contribute.

Supply shortages and increased demand are both driving price rises. But this has left many with limited resources in a difficult position.

Meanwhile, the housing price bubble continues to grow. The government has taken measures to deflate it but to little effect. Total real estate investment showed a 34.1% quarterly gain, of which residential was 37.4%. Underlying this is the fact that sales of land are a major source of income for local governments throughout China. They aren't going to give that up lightly.

But there are also some who really don't believe the inflation is genuine. They think producers have used it as an excuse to increase profits.

It is also well known that hoarding of goods has taken place to inflate prices artificially. This has created a deep mistrust of the system.

So what's the solution? The government is desperate to get inflation under control but it also needs to keep GDP up and the population in employment.

So far GDP is holding up with a 9.7% quarterly increase. But there is still too much government money going into fixed-asset investment. Roads and bridges are a quick fix only and don't have the lasting benefit of more productive investment. Government expenditure will continue to be one of the drivers of inflation.

In the past, China's GDP has been investment and export-led. Both of these need to be overtaken by more domestic consumption.

This is the primary aim of the present five-year plan. Exports and imports grew strongly in the quarter, but for the first time in six years there was a trade deficit. The economy needs rebalancing and inflation is making this rather difficult.

Monetary weapons are being deployed, with interest rates tweaked again last week for the fourth time in six months. Bank reserve ratios now stand at 20% after another 0.5% increase last month. But lending continues to rise as do concerns about the quality of the banks' loan books.

This week the government tried a new approach and asked associations of the All-China Federation of Industry and Commerce to get their private company members to limit price rises.

Will this work? Great if it does - the Party still wants everyone to be happy bunnies in the year of the rabbit.