China still needs to do more to prevent price increases from becoming deeply entrenched within its economy, a top regulatory official said in a published report on Wednesday.

Xu Lianzhong, head of the price analysis and forecast division of the National Development and Reform Commission's Price Monitoring Center, urged the government to give tax breaks and other incentives to companies and boost subsidies to farmers to augment previous steps used to fight inflation.

The causes of the latest round of price increases are complicated, Xu said in Wednesday's China Securities Journal. They were triggered by both rising demand and surging costs, and influenced by domestic and global factors, he said.

"Although the major driver of the price rise remains rapidly expanding food costs, we should take notice of rising producer prices and the pressure of imported inflation brought by increasing costs in the global market," Xu said. "The risk of an all-around price rise still exists."

He also said price controls on resources such as electricity and oil helped mitigate inflation. But loosened controls over these products would aggravate the risk of a runaway price surge.

In February, China's Consumer Price Index, the main gauge of inflation, rose to a near 12-year high 8.7 percent. It then began to ease thanks to the government's efforts to stabilize supply. In June, CPI growth was cut to 7.1 percent.

But while food costs slowed, the Producer Price Index, the factory-gate inflation measure, flared.

It reached 8.8 percent in June, the highest since at least 1996 when data became available on the Website of the National Bureau of Statistics.

Xu predicted that the CPI would settle at around 5.5 percent in the third quarter and decline to 4.5 percent in the fourth quarter, given government monetary policies.

He proposed that the state cut the income tax rate for companies and increase any subsidies they receive to relieve the pressure of cost increases.

Xu said the government should also expand subsidies given to farmers for the purchase of fertilizer, seeds and pesticides, and cut the price of electricity and petroleum for agricultural use, to strengthen the effect of previous efforts.

(Shanghai Daily August 7, 2008)