China’s inflation rose to a 37-month high last month, adding to pressure on Chinese leaders to cool living costs, while keeping economic growth on track as the US and European outlook worsens.
Consumer prices in the world’s second-largest economy rose 6.5 percent compared with a year earlier, up from June’s 6.4 percent, data showed yesterday. This was driven by a 14.8 percent jump in food costs, up from June’s 14.4 percent and leaving the inflation rate well above the government’s 4 percent target for the year.
The jump in prices came despite a slowdown in manufacturing and other economic activity last month following repeated interest rate hikes and other curbs imposed to cool an overheated economy.
Beijing has to strike a difficult balance between stopping inflation and easing controls to support Chinese companies as US and European demand weakens, IHS Global Insight analyst Alistair Thornton said.
“They’re in a really tough position now,” Thornton said. “If they want to start loosening [monetary policy] and buoying up growth, they could face the risk of compounding higher-than-desired inflation.”
Analysts blame the inflation spike on the dual pressures of consumer demand that is outstripping food supplies and money surging through the economy from a bank lending boom that helped China ward off the 2008 global crisis.
Rising prices, especially for food, are politically dangerous for the Chinese Communist Party because they erode economic gains that underpin its claim to power.
Some observers had expected at least one more Chinese rate hike this year, but analysts said that now looked unlikely because of uncertainty following Standard & Poor’s downgrade of US sovereign debt.
“This is the kind of data that should trigger [an] interest rate hike, but the turmoil in global financial markets will probably delay the action,” Wei Yao (姚煒), China economist for Societe Generale, said in a report.
Inflation has climbed steadily despite five interest rate hikes since October last year and government curbs on lending and investment. Analysts expected it to peak by midyear and then decline, but prices for pork and vegetables spiked up after summer floods wrecked crops in China’s south and east.
The price of pork, China’s staple meat, rose 56.7 percent last month over a year earlier, the National Bureau of Statistics reported. Eggs rose 19.7 percent and fresh vegetables were up 7.6 percent.
The overall price rise was the fastest since June 2008’s 7.1 percent.
Inflation is likely to stay above 6 percent through the quarter that ends next month, Wei said.
Chinese Premier Wen Jiabao (溫家寶), the country’s top economic official, expressed confidence in June that inflation was under control. However, he later acknowledged it would overshoot the official 4 percent target for the year.
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 to cool prices.
Smaller private companies that produce a big share of China’s growth and new jobs have been hit hard by the curbs on lending. Widespread reports say many cannot get credit at a time when they also face pressure from higher wages and other costs.
“There is growing concern about China’s ability to achieve sustainable growth in the future,” Jing Ulrich (李晶), JPMorgan’s chairwoman for global markets, China, said in a report to clients.