U.S. News

Chinese Inflation Creeps Higher as Food Prices Rise


Chinese consumer inflation rose in February on the back of higher food costs, but economists said they did not expect price pressures to get out of hand despite breakneck growth and plentiful cash in the banking system.

The consumer price index was up 2.7% from a year earlier, the National Bureau of Statistics said. That was more than January's 2.2% annual increase but fell short of market forecasts of a 2.9% rise.

Combining January and February to iron out calendar quirks caused by the timing of the Lunar New Year holidays, prices were up 2.4% from a year earlier. In the same two months of 2006, the increase was 1.4%.

Higher food prices, which make up a third of the consumer basket, have been largely responsible for the rising inflationary trend over the past year. They were up again in February, by 6.0 percent over the same month last year.

Gao Shanwen, chief economist at Everbright Securities in Shanghai, said the CPI may climb a bit more but would then slow and average 2.1% or 2.2% for the whole year, compared with last year's average rate of 1.5%.

That was because grain prices were unlikely to keep rising -- a view shared by senior central bank officials, who expect consumer inflation for the year to remain below 3%. "Grain demand and supply are in balance and will tend to remain balanced this year," Gao said.

But Paul Cavey, an economist with Macquarie Securities in Hong Kong, said inflationary risks were greater than assumed. "We think food prices in China are being driven by global food prices, which China can't do anything about," Cavey said.

Other prices were also climbing, Cavey said. Although annual non-food inflation in February was just 1.0%, clothing and durable goods prices are rising for the first time in 10 years. "That's a trend we expect to pick up pace during the course of this year," Cavey said.

Consumer goods cost 3.0% more in February than a year earlier, according to the statistics office. In July the inflation rate for this category was just 0.7%.
Central Bank's Dilemma

At current inflation rates, after-tax bank deposit rates are negative in real terms, inviting depositors to withdraw their cash and pump it into property and stocks, raising the risk of asset price bubbles. "It doesn't leave the government with very much comfort," Cavey said of
today's interest rate levels.

But Gao said a rise in rates, which were increased twice in 2006, would not deter firms from borrowing because their profits are so strong. "I think another interest rate rise to keep inflation in check is absolutely unwarranted," he said.

Further increases in banks' reserve requirements -- which the central bank has raised five times since June -- and a faster rise in the yuan would be more effective in steering the economy, Gao said.

Economists at Goldman Sachs said they expected price pressures to start easing after the first quarter. "However, if the trend of monetary expansion continues to accelerate at the current speed, it will likely post renewed inflationary pressures heading into the second half of the year," they said in a note to clients.

The central bank reported on Monday that annual growth in the broad M2 measure of money supply jumped to 17.8% in February from 15.9% in January. New bank lending also surged last month.