A Slight Inflation Impending
Professor，National School of Development
Prof. Song discussed two issues: first, the volatility in M1 growth and its major cause; second, the inflation outlook.
M1 grew 39.7% year on year in January, more than twice the average growth rate in the past ten years. But the month on month index is not that serious. The ratio of M1 to M2 varies greatly in recent years, mainly as a result of changes in the relative shares of residents' deposits and enterprise deposits. Furthermore, the major factor influencing the relative shares of different deposits is housing sales, which transforms the residents' deposits into the enterprise deposits, largely demand deposits counted in M1.
Housing sales do not affect private consumption, because private wealth change little when residents convert deposits into housing. However, housing sales increase enterprise deposits and thus the enterprise demand. The reverse relationship between housing sales and money growth since 2009 has smoothed the aggregate demand to some extent. But it is accidental.
CPI grew strongly month on month in December 2009, then fell somewhat in January, and varied little in February. The annualized CPI inflation during the past six months is 2.8%, a relatively moderate level. To sum up, the inflation pressure caused by money growth in 2009 has been released sufficiently.
The trade surplus is very likely to rise in 2010. The balance of aggregate demand requires a lower growth in investment than 2009. The relationship between money and inflation will restore the state before 2008.