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      Two Sides of Latest Inflation

      http://www.sina.com.cn 2004/03/23 11:19  Shanghai Daily

      The latest round of inflation might make the rich richer and the poor poorer.

      According to the National Bureau of Statistics' February consumer index report, the overall index was 2.1 percent higher than a year ago.

      On the surface, this was something to celebrate, because it was lower than the six-year high of 3.2 percent in January.

      But a closer look at the price structure is a bit disturbing.

      Prices of daily necessities have increased. The price for food surged 5.6 percent over a year ago, 17.5 percent for crops, 10.9 percent for meat and poultry, 23.9 percent for edible oil, and 15.1 percent for fresh eggs. Only the price of fresh vegetables dropped 10.4 percent.

      For poor families, the higher price for food is a burden.

      In contrast, the cost of living has become cheaper for well-off families.

      The price of vehicles slid 3.9 percent. Telecommunication devices such as mobile phones and pagers dropped 15.6 percent. Telecom services were also 0.3 percent cheaper than a year ago.

      Durable goods, such as TV sets and washing machines, were 3.4 percent cheaper. Travelers could also spend 8.9 percent less than a year ago for the same tour package.

      This round of food-price-driven inflation not only hits the poor at large, but also farmers specifically.

      Contrary to the claims of many economists, farmers have not necessarily benefited from the rise in food prices.

      Yes, food farmers make more from rising prices, but they also are spending more on raw materials such as feeds and fertilizers.

      A report from the Ministry of Agriculture said the cost of most materials continued to increase in January. The price of urea rose about 14 percent from a year ago to nearly 1,500 yuan (US$180.72) per ton. Pig feeds were about 20 percent more expensive and the cost of diesel, which powers agricultural equipment, was about 13 percent higher.

      The February retail report corroborates the finding that farmers still have limited purchasing power. In February, urban retail sales expanded by 12.1 percent from a year ago, outpacing the 7.5 percent growth in rural areas. Given the fact that the February inflation rate in rural areas was 3.3 percent year-on-year - more than doubling the 1.4 percent in cities - it is premature to say that the recent food price hike has made farmers richer.

      More expensive raw materials aside, it is uncertain whether the prices of agricultural products will continue to pick up, once the current shortage of supply ends.

      More and more farmers are indeed investing in agricultural products, which in turn drives up raw material prices. But no one knows for sure whether their investment will be successful.

      A possible glut of grain, pigs and soy beans might hit the market later and wipe out their gains altogether.

      The interest of farmers is no trivial thing. Premier Wen Jiabao said earlier this month that China's economy is at "a critical juncture."

      Buoyant national economic growth has not addressed all problems, including the world's largest wealth gap.

      Current inflation levels will not boost farmers' long-term income, as some economists claim.

      On the contrary, farmers may be dealt a double blow: prices for agricultural products may drop because of over production; while the cost of raw materials has continued to climb.