There have been two serious inflationary periods since China carried out its reform and opening-up policy, mainly triggered by the country's pricing system reformation and growing production costs. In 1988 and 1989, the CPI increased 18.8 percent and 18 percent, respectively. The second inflationary period was from 1993 to 1995, with the CPI increasing 14.7 percent, 24.1 percent and 17.1 percent, respectively. Chen pointed out that the recent inflation is different, involving both growing demand and rising costs. The inflation is partly due to domestic reasons, including such natural disasters as the January snowstorms and the May 12 earthquake.

"The trouble is the influence of CPI usually comes later than the index increase, and will be reflected step by step. Under those circumstances, the Chinese Government's macro-control policy is crucial," said Chen, who made several recommendations.

Within a short period of time, the government needs to offer subsidies to low-income families, protect the domestic market by adjusting the customs tariff rate, reform the pricing system and keep prices at a proper level, and launch a market diversification strategy.

Over the long term, Chen said, the government should pay more attention to agriculture and agriculture-related industries, adopting favorable policies so as to guarantee the country's supply. As energy prices increase, China must encourage businesses to improve energy efficiency, protect the environment and create a low-carbon economy.

Chen also said that a tighter monetary policy is usually the way governments cope with inflation. But if money is too tight, she said, it will be difficult for businesses to secure loans and the country might experience stagflation. The past decade has been a golden era of economic development for China. The country's annual economic growth averaged about 10 percent, while its annual CPI increase stayed under 1 percent. "This era has ended," Chen said. "Inflation will stay at a higher level in coming years. I believe that a yearly inflation rate of 5 to 6 percent will still be proper."

Zhen said the Chinese Government should make controlling inflation its top priority. Tighter monetary policy might damage some sectors, like enterprises in coastal cities that engage in export, he said, but growing inflation would bring much bigger risks, including a threat to social stability. Since late 2007, China has been increasing the required deposit reserve ratio and bank interest rates. The CPI increases in May and June were 7.7 percent and 7.2 percent, respectively, while economists estimated the CPI would increase about 6.5 percent in July. In September, it might fall back to 5 percent. "The facts prove that current macro-controlling policy and tight currency policy work well," Zhen said.

He also gave several suggestions that target food and energy prices. The Central Government must continue to stabilize domestic prices, he said, and take strong measures to develop agriculture. He also believes that the government should increase the price of finished oil products and decrease fuel subsidies. "Maybe for a short time, a policy like this would push the CPI even higher," Zhen said. "But for a long time thereafter, it would release the country's financial burden, encourage energy saving and combat Western countries' accusations of ‘energy protectionism.'"

He added that the government could implement favorable policies, such as offering subsidies and improving export drawback rates, to help export companies through difficult times. "Targeting different places and different aspects, the government can choose different countermeasures," he said. The State Administration of Taxation announced on July 30 that China had increased the export drawback rate for partial textile products from 11 percent to 13 percent, while canceling some agricultural products' export drawback starting from August 1. These measures could be the start of a series of new macro-controlling policies.