The public is skeptical

A PBC survey of urban households showed that in the fourth quarter of 2006, about 50.8 percent predicted prices would increase in 2007. Further, urban residents' satisfaction with prices declined for three consecutive quarters, hitting a record low of 10.8 percent.

Moreover, a research report of the Institute of Urban Finance under the Industrial and Commercial Bank of China (ICBC) also concluded that there will be a lot of pressure on prices to continue to rise this year.

According to the report, although the CPI and the producer price index (PPI) remained stable on the whole, they increased more rapidly after the third quarter, rising 1.4 percent and 1.9 percent respectively in October, putting pressure on prices to further rise in 2007. Since pricing reform of resource products such as water, electricity, gas and coal will be carried out, prices of public utilities also are on the upswing. Owing to the high price of energy products in the international market, producer prices of industrial products as well as raw materials and fuel power could also rise. Further, it is very likely housing prices will continue to rise. Finally, the rapid increase of money supply could stimulate price hikes in 2007.

"The price hike of assets represented by the soaring housing prices and stock prices will expand the risks of inflation," said the ICBC report.

A January report released by the National Development and Reform Commission (NDRC) also holds that prices of capital goods will rise in 2007. The report explains that in 2007, while world economic growth may slow down, it will not fall markedly compared with 2006, and economies both at home and abroad will maintain a fairly high growth rate. Domestic fixed asset investments will continue to exhibit strong growth, influencing demand for capital goods.

The NDRC report also predicts that in 2007, prices of capital goods will go up 2-3 percent.

In addition, energy prices are likely to rise this year. As for petroleum and natural gas, industry leaders suggest that compared with the international market, prices in the domestic market are still low and need to catch up. As for coal, the major suppliers in Shanxi Province began to collect surcharges for coal transported out of the province, which means that most of other provinces have to pay more for coal.

"The price of a product is composed of three parts: prices of raw materials, labor and profits. At present, the first two parts are increasing," said Wang Jian, Secretary General of the China Society of Macroeconomics.

Labor payment has also been increasing in recent years. A PBC report shows that China's labor costs are growing. In 2005, salaries went up 10-15 percent. Since prices of raw materials and labor payments are growing, those of commodities are naturally increasing.