Chinese Consumer Inflation Rebounds in October

Soaring food costs drove up China's inflation in October, reinforcing expectations that the central bank will raise interest rates again before long to keep a lid on price pressures.

Consumer price inflation quickened to 6.5 percent in October, matching the near 11-year peak scaled in August, from 6.2 percent in September, the National Bureau of Statistics said on Tuesday.

Investors track stock prices, China
Investors track stock prices, China

"Definitely, this increases the possibility of an imminent rise in interest rates," said Xue Hua, an analyst with China Merchants Securities in Shenzhen.

Xue said the People's Bank of China, which has raised rates five times so far this year, could act as soon as this week.

Economists polled by Reuters had expected an inflation rate of 6.4 percent, although market traders had been whispering for days that the outcome would be 6.5 percent.

Inflation was last higher in December 1996, when the rate was 7.0 percent. Goldman Sachs promptly ratcheted up its full-year inflation forecast to 4.8 percent from 4.5 percent. For 2008 the investment bank now expects prices to rise 4.5 percent instead of 4.0 percent.

"We believe the central bank will likely respond with additional tightening measures including strict control on bank lending and two more rate hikes before the end of this year," Goldman economist Yu Song said in a note to clients.

Political Concern

Non-food prices rose just 1.1 percent in October from a year earlier, the same pace as in September. But food prices soared 17.6 percent, with vegetables up 29.9 percent and food oil up 34 percent.

Price concerns were linked to a stampede at a store in southwestern China on Saturday. Three people were crushed to death when shoppers rushed into a Carrefour supermarket that had a special discount on cooking oil.

Rising inflation has also been a recipe down the years for social unrest in China.

Underlining official concern, Premier Wen walked through the alleys of historic Beijing on Monday, asking residents if they could afford to eat meat and telling them he understood even a 1 yuan ($0.14) increase in prices had an impact on the lives of ordinary people.

"Today I just want to sit down and talk with everyone, understand the impact of rising prices on citizens' lives," Wen said. "Resolving the difficulties of the masses is the government's responsibility."

Some economists see rising inflation as a temporary supply shock caused by pig disease, among other factors. But Dong Tao, chief economist at Credit Suisse in Hong Kong, voiced concern that higher food costs could spread through the economy as people came to expect ever-higher prices.

"Non-food inflation so far has been flat, but the persistent pressure on living costs will translate into wage increases, rent increases and service price increases. Once we get to that level, the inflation problem will be an even bigger problem," he said. "When you see the costs at your dinner table going up forever, you will go to your boss and say, 'Either you give me a salary increase or I will quit for another job'."