China's inflation jumps to 3-year high | Inquirer Business

China’s inflation jumps to 3-year high

/ 01:00 PM July 09, 2011

BEIJING—China’s surging inflation accelerated to a three-year high in June even as the overheated economy began to cool.

Consumer prices rose 6.4 percent over a year ago, a sharp jump from May’s 5.5 percent rate, data showed Saturday. It was driven by a 14.4 percent rise in politically volatile food costs, up from 11.7 percent in May.

“This far exceeds expectations,” said IHS Global Insight analyst Alistair Thornton.


Communist leaders declared taming prices their priority this year and have been frustrated as inflation rose steadily, even as manufacturing and other activity eased in the face of repeated interest rate hikes and other controls.


Inflation is politically dangerous for the ruling communists because it erodes economic gains that underpin their claim to power and can fuel unrest.

The Cabinet’s planning agency had forecast that June inflation would likely exceed May’s increase due to summer flooding that damaged crops and pushed up prices of pork and vegetables.

The price of pork, the country’s staple meat, jumped 57.1 percent in June, the National Bureau of Statistics reported. That is especially sensitive in a society where poor families spend up to half their incomes on food.

The June figures were released earlier in the month than usual in what the bureau said is a new policy to prevent leaks by announcing data as soon as they are compiled.

A state newspaper said last month that several officials of the bureau and China’s central bank were fired on suspicion of leaking data to stock brokerages, which might have profited from being able to anticipate changes in financial markets.

Analysts blame the inflation spike on the dual pressures of consumer demand that is outstripping food supplies and a bank lending boom they say Beijing allowed to run too long after it helped China ward off the 2008 global crisis.


Li Peilan, a 70-year-old Beijing housewife, said food costs consume nearly half her family’s 6,000 yuan ($920) monthly income.

“Considering other costs such as buying other daily items and the education of my grandson, we are almost spending all of our income now,” Li said as she shopped at a market in the Chinese capital.

Rapid growth in factory output and other activity have eased in recent months as the government tries to steer world’s second-largest economy to a more manageable growth pace after last year’s double-digit expansion.

Beijing has raised interest rates five times since October — most recently on Wednesday — but analysts say another rise or tighter limits on bank lending might be imposed if inflation stays high.

The rate hikes also increase the payout on bank deposits, which helps to put money in consumers’ pockets. Still, the 3.5 percent deposit rate after the latest increase is well below inflation, meaning Chinese households lose money by keeping it in the bank.

China’s economy expanded by a sizzling 9.6 percent in the first quarter of the year and even though growth is easing, it is expected to be close to 9 percent in the second quarter. The World Bank raised its forecast of China’s economic growth in April from 8.5 percent to 9.3 percent and said Beijing should tighten monetary policy further.

Premier Wen Jiabao, the country’s top economic official, expressed confidence last month that inflation was under control. But he later acknowledged it would overshoot the official 4 percent target for the year.

June’s rise in the consumer price index was the fastest since 7.1 percent rate in June 2008.

“I don’t think this means the wheels are falling off. But it means they underestimated what pumping all that money into the system over the past three years can do,” Thornton said.

China’s central bank governor said Friday that the bank’s inflation fight is complicated by the fact that its official mission requires it to support growth and employment.

“It’s difficult for China’s central bank to only set one objective of controlling inflation,” governor Zhou Xiaochuan said in a speech at Tsinghua University, the newspaper Beijing News reported.

Zhou said China “can tolerate a certain degree of inflation” in the course of rapid changes in its economic growth patterns, the newspaper said.

Analysts expect inflation to stay high through at least July but said it should decline in the second half of the year as the economy cools.

Manufacturing activity in June slipped to a 28-month low due to curbs on credit and weaker overseas demand, according to the China Federation of Logistics and Purchasing, an industry group. It said the downward trend was likely to continue.

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“Growth will continue to slow,” HSBC economist Qu Hongbin said this week. “This is a necessary evil for China to fight inflation.”

TAGS: Business, Economy and Business and Finance, Inflation

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