Inflation rises to 11-year-high as food costs soar
20 Feb 2008
Inflation in China surged to an 11-year high of 7.1 percent in January, prompting analysts to suggest Beijing would stick to a tight monetary policy. Economists believe a faster yuan appreciation and increasing imports would be effective in curbing inflation.
"The aggressive monetary easing by the US Federal Reserve has limited the room for China to hike domestic interest rates," Qing Wang, China economist at Morgan Stanley, explained.
Despite being slightly lower than average market expectations of 7.5 percent, last month's inflation, according to the National Bureau of Statistics, was the highest in more than 11 years, up from 6.5 percent in December.
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The high price of food - which makes up one-third of the consumer basket - was still the main CPI driver.
Food prices which were affected by the recent snowstorms rose 18.2 percent year-on-year last month compared to the 1.5 percent increase in non-food prices.
Rising factory-gate prices also appear to be fueling inflation. The January producer price index reached 6.1 percent.
"In the near term, seasonal factors are likely to keep headline inflation elevated," said Qian Wang at JPMorgan. Deutsche Bank economist Jun Ma, expects consumer prices to reach 8 percent by March.
But full-year consumer prices will be around 4 to 5 percent because the price rises arising from the blizzards and the Lunar New Year will wear off in the second half, economists said.
Since interest rates are generally seen as less relevant for curbing the current bout of supply-side inflation pressure, Wang at JPMorgan believes the government is not likely to respond with a rate increase.
A dearer currency will make imported goods cheaper and slow down China's trade surplus, Ha Jiming, economist at China International Capital Corporation, pointed out.
Since it was de-pegged in July 2005, the yuan has risen by 13 percent against the US dollar, and is expected to gain at least 10 percent this year. It rose to 7.1532 to the dollar yesterday, the highest level since 2005.
