China's inflation hits 28-month high at 5.1%

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Dec 12, 2010
China's inflation hits 28-month high at 5.1%


Beijing - China's inflation surged to a 28-month high last month, officials said yesterday, despite government efforts to increase food supplies and end diesel shortages.

The 5.1 per cent inflation rate was driven by an 11.7 per cent jump in food prices year on year.

The news comes as China's leaders meet for the top economic planning conference of the year and as financial markets watch for a widely anticipated interest rate hike to help bring rapid economic growth to a more sustainable level.

'I think this means that an interest rate hike of 25 basis points is very likely by the end of the year,' said CLSA analyst Andy Rothman.

China took the unusual move of releasing the inflation figure on a Saturday, giving the markets time over the weekend to digest the news.

'So obviously we knew we were in for quite a large number,' said Mr Alistair Thornton, China analyst for IHS Global Insight.

Economists had forecast that China's inflation rate would likely rise to over 5 per cent last month.

Beijing is trying to rein in food prices by launching efforts to increase production of vegetables and other basic goods. The authorities are cracking down on hoarding and speculation that they say are partly to blame for the price rises.

The National Statistics Bureau also said industrial output, an indicator of economic health, was up by 13.3 per cent last month year on year. Retail sales were up 18.7 per cent, important to the government's effort to build up domestic consumption to drive growth. Neither figure was a surprise.

China's inflation has been rising steadily this year despite government efforts to cool an investment boom. It spiked to 4.4 per cent in October - well above the official 3 per cent target.

Economists blame the price hikes on a flood of money coursing through the economy from stimulus spending and bank lending that helped China recover quickly from the global crisis.

Inflation is especially sensitive in a society where poor families spend up to half their incomes on food. Rising incomes have helped to offset price hikes, but inflation undercuts economic gains that help support the ruling Communist Party's claim to power.

Inflation has risen well above the 2.5 per cent interest paid on Chinese bank deposits. That has triggered an outflow of cash into stocks and real estate as families seek a better return, fuelling fears of a dangerous price boom and bust.

Analysts have said inflationary pressure could spread to other areas unless Beijing raises rates and tightens credit.

Last Friday, China's central bank raised lenders' reserve requirements for the third time in a month to sop up some of the excess cash in the economy that is driving prices higher. With inflation on the march, analysts said that more resolute action was needed.

'At least one interest rate rise is needed for this year, otherwise the authorities will give the public quite a surprising message, because if you see inflation but no rate hike, people will doubt the determination to fight inflation,' said economist Shen Jianguang, who is with Mizuho Securities in Hong Kong.

AP, Reuters


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