Continually rising food prices are accelerating income growth in rural parts of the country, where more than 60 percent of China's population live, increasing buying power and fueling inflation, ING said in a report released yesterday.

China's consumer price index is likely to rise 1 percent this year, mainly driven by rising prices for food, housing and services as well as utility fees, the report said.

The country finally ended 20 consecutive months of deflation in January, when surging vegetable prices pushed the CPI up 0.4 percent.

During the first five months of this year, consumer prices rose 0.6 percent from the same period last year.

ING is forecasting that consumer prices will rise by 2 percent next year, and suggests higher prices could actually boost retail sales as consumers stop saving money on the expectation that goods will become cheaper.

With average incomes in rural China rising 8 percent during the first quarter of this year, consumption should continue to grow in the medium term, said ING economist Tim Condon.

ING expects toll fees, container terminal handling charges and other service fees to rise in the near future, but is forecasting lower power tariffs and telecom charges.

Higher incomes should continue to propel property rental fees across the country.

Rental rates in Shanghai have been on the rise for the last six months.

Increased foreign investment in China has increased the demand for property pushing up both rental and purchasing prices, said Edward Cheung, general manager of real estate consultant DTZ Debenham Tie Leung.

ING is also expecting China to slightly raise the value of its currency before the end of next year, a move made easier by the weakness of the US dollar to which the renminbi is pegged.

(eastday.com June 25, 2003)