The National Development and Reform Commission (NDRC) announced on Thursday night its decision that prices for fuel would rise by 17 and 18 per cent, respectively, for gas and diesel. The rise took effect as of Friday, 20 June 2008 and was widely unexpected at this point in time with the prospect of “shaking up markets“. Additional to this immediate hike of fuel prices, the NDRC also announced that electricity prices would be raised as of 1 July 2008.
The main explanation for the move was given as facing the problem of the spread between production cost for refineries and market prices, which was ever increasing with rising oil prices: It was reported that refineries lost up to USD 435 per tonne of fuel, making the situation an unsustainable one. Certainly, the hike in energy prices is right as it brings the domestic prices closer to international market prices and thus enables the built-in stabilizer of lower demand through rising prices to work. It inevitably, however, will make it harder for the central bank and the other authorities to rein inflation growth in the short-run. And indeed, PBC Governor Zhou is quoted that the fuel rise “could require stronger monetary policy measures to contain inflation” (20 June 2008).
Asia Times Online refers to Frank Gong of JP Morgan with an estimate of the influence on the inflation rate: “A 10% increase in the diesel price should raise China’s headline consumer price index (CPI) by about 0.4 percentage points, while the electricity price hike is expected to influence the CPI by around 0.3-0.5 percentage points.” Don’t expect anymore the June 2008 inflation rate to continue the decreasing path of May.
