Galloping food prices boosted Chinese consumer inflation to 5.6% in July, the highest rate in more than a decade, leaving the central bank with a dilemma over whether to tighten policy further.
The unexpectedly large jump, from 4.4% in June, entirely reflected a spike in food prices caused by a shortage of pig stocks and flooding across large parts of China. The figure, which easily beat market forecasts of 4.9%, was the highest since February 1997.
The price of food, which makes up a third of the consumer basket, rose 15.4% in July from a year earlier; meat prices rose 45.2%, eggs 30.6%, food oil 30.1% and vegetables 18.7%, the National Bureau of Statistics said on Monday.
But annual inflation in non-food items actually dipped to 0.9% from 1.0%, indicating that China is not yet transmitting extra inflationary pressures to the world economy. Food accounts for just 3% of the country's exports.
"The number is higher than expected and will add to the overall perceived difficulty that central bankers globally are facing in that we continue to have strengthening inflation in the context of significant financial market stress.
"But this is entirely a domestic dynamic that's occurring in China," said Glenn Maguire, chief Asia-Pacific economist for Societe Generale in Hong Kong. Maguire is among those economists who believe monetary policy is powerless to do anything about factors such as bad weather and pig disease.
Zhu Baoliang, chief economist at the State Information Centre, a government think-tank in Beijing, noted that price rises still have not spilled over to other parts of the economy. "I think these factors are still temporary and the central bank should face little pressure to step up tightening," he said.
According to this line of thinking, the year 2004 offers lessons. A jump in grain prices propelled the annual inflation rate to 5.3% in July and August that year. But it soon subsided to 2.4% by December.
However, Stephen Green with Standard Chartered Bank in Shanghai said there were reasons to believe the current breakout in inflation was not just about pork and other meat shortages.
He cited accelerating growth in industrial output, quickening money supply growth, record stock market prices and a reacceleration of property prices in Shanghai.
"We believe the argument is finely balanced -- but that the current situation requires caution, because more general inflation may already be in the system," he said in a note.
Given concern over inflation expressed by the central bank in a report last week, Green said the chances of another increase soon in interest rates -- the fourth this year -- were very high.