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China's Consumer Inflation Stays Near 12-Year High

Reuters
Sunday, 11 May 2008 | 11:46 PM ET

China's consumer price inflation clung near a 12-year high in April, maintaining pressure on the government to stick to its tight policy stance despite softening global growth.

For authorities who have insisted their priority is to tackle price rises, the quickening of annual inflation to 8.5 percent from 8.3 percent in March will be frustrating, while also allowing them a glimmer of optimism.

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"This isn't something the government will necessarily panic about, particularly as food prices are now beginning to fall," said Paul Cavey, economist at Macquarie Securities in Hong Kong.

Apart from February's reading of 8.7 percent, inflation was last higher in May 1996, when the rate was 8.9 percent.

Food prices, which make up a third of the consumer basket, have been the overwhelming driver of inflation. They rose 22.1 percent in April from a year earlier, though weekly government reports on fresh food prices have showed a slight dip in May.

Non-food prices rose 1.8 percent in April from a year earlier, the same as in March.

"Greater prominence needs to be given to curbing inflation and controlling price rises," the National Bureau of Statistics said in a statement accompanying the inflation data.

Zhou Xiaochuan, China's central bank governor, said on Saturday that the country would give precedence to tackling inflation over targeting growth or employment.

Even as easing food prices give some grounds for hope, pipeline pressures have built up with the producer price index, or factory-gate inflation, hitting a three-and-a-half year high of 8.1 percent in April.

"As underlying inflationary pressures remain undiminished, it is vital for the government to keep its tightening policy stance to anchor inflationary expectations," Hong Liang and Yu Song, Goldman Sachs economists in Hong Kong, said in a client note.

The government declared it would tighten monetary policy this year to fight inflation, but it has yet to raise interest rates after six increases in 2007.

Instead, it has drawn on an array of tools, from bank lending curbs to faster yuan appreciation -- the central bank on Monday set the highest daily reference rate for the yuan, 6.8920 per dollar, since it ended a fixed peg to the U.S. currency in July 2005.

"Many had expected the CPI to ease in April, but the figure is not so terrible because it's still mainly caused by food items," said Feng Yuming, an analyst with Orient Securities in Shanghai. "I don't think the government will tighten monetary policy further simply because of the figure."

The 8.5 percent reading was in line with a Reuters report last Thursday based on information from sources familiar with the data. Economists had expected a rate of 8.3 percent.

The government set a target of 4.8 percent for average inflation in 2008, but in recent weeks a series of officials have said the real number would very likely top that.