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Food Costs Boost Chinese Inflation to Decade High of 6.5%

China's consumer price inflation jumped to 6.5% in August, the highest level since December 1996, as a shortage of pork contributed to a surge in food prices.

China's ruling Communist Party, aware that inflation in the past has touched off unrest in China, has voiced increasing concern about the speed of price rises and has introduced a raft of incentives to increase the supply of pigs and pork.

The inflation rate, up from 5.6% in July, easily surpassed economists' forecasts of 5.9% and cemented expectations that the central bank will keep tightening monetary policy.

"The central bank may increase interest rates again either at the end of September or early October," said Qiu Gaoqing, senior economist with Bank of Communications in Shanghai.

The National Bureau of Statistics said meat prices rose 49.0% in August from a year earlier.

A shortage of pork, China's staple meat, has been the main reason for the spike. China's pig population has fallen 10% due to disease, fast-rising feedgrain costs and low prices last year, which prompted farmers to rear fewer hogs.

Food accounts for a third of China's consumer price basket.

Most economists accept that a central bank can do little about supply shocks, and non-food prices rose just 0.9 percent in August from a year earlier.

But the People's Bank of China has voiced worries that inflation will start rippling through the economy as people demand higher wages and businesses, such as restaurants and hotels, raise their prices.

To keep a lid on inflation and prevent the world's fourth-largest economy from overheating, the central bank has raised interest rates four times this year and ordered banks on seven occasions to tie up more of their deposits in reserve.

"The risk is that if the economy continues to grow very rapidly, this inflation, which looks concentrated in food, starts spreading and influencing inflationary expectations," said Rob Subbaraman, chief Asia economist for Lehman Brothers in Hong Kong.