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China's Inflation Hits 11-Year High of 7.1%
By: Reuters | 18 Feb 2008 | 11:22 PM ET
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China's annual consumer price inflation jumped to 7.1 percent in January, the highest in more than 11 years, reinforcing expectations that Beijing will stick to a tight monetary policy despite softening economic growth.

Eugene Hoshiko / AP

The rate, up from 6.5 percent in December, was in line with market forecasts and was the highest since September 1996.

Food prices, which make up one-third of the consumer basket, rose 18.2 percent in January from a year earlier, the same rate as in November. Non-food inflation ticked up to 1.5 percent from 1.4 percent.

The National Bureau of Statistics, which issued the figures on Tuesday, had not provided a breakdown of December's Consumer Price Index.

"I don't think the monetary authorities will relax policy any time soon because credit is strong, exports are strong, the PPI is high and now the CPI is high," said Gene Ma, chief economist with China Economic Monitor in Beijing.

The Producer Price Index, issued on Monday, was up 6.1 percent in the 12 months to January, the highest in more than three years.

Xinhua news agency said the statistics office attributed the jump in the Consumer Price Index to the timing of the Lunar New Year holidays this year and to fierce winter weather.

Large parts of central and southern China experienced their worst snowstorms in decades in January and early February, disrupting transport links and damaging crops and greenhouses.
     
Yuan Rising

But Jun Ma, chief China economist at Deutsche Bank in Hong Kong, disagreed that the spike in prices was temporary and said pressures already in the pipeline were likely to drive the CPI up 8.1 percent by March.

"It's going to be very tricky in the next few months. Right now, there is pressure for monetary authorities to relax a little bit due to the need for financing reconstruction after the snow storm and also pressure from the export sector, screaming that they are facing a lot of U.S. downside risk," Ma said.

"But I think probably in the second half of March or April, when inflation continues to make new highs, the government will be convinced that further tightening is inevitable," he added.

Ma said he expected two fresh interest rate increases in coming months, while others said they expected the central bank to put more emphasis on containing inflation through the exchange rate.

A dearer currency will make imported goods cheaper and reduce China's trade surplus, the fount of excess liquidity that economists say is fuelling inflation.

The central bank, which keeps the yuan on a tight leash, let the currency rise on Tuesday to 7.1532 per dollar, the highest level since the yuan was depegged from the dollar in July 2005 and allowed to float within managed bands.

The yuan's rate of climb has already quickened in tandem with the rise in inflation over the past few months.

"We believe that accelerating further the appreciation of the currency will be the way to mop up liquidity stoked by inflows of money from the balance-of-payments surplus. That is still the major source of inflation in China," said Mole Hau, an economist at Core Pacific-Yamaichi in Hong Kong.

Copyright 2009 Reuters. Click for restrictions.
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