Inflation hits 22-month high as floods drive up food prices

PUBLISHED : Sunday, 12 September, 2010, 12:00am
UPDATED : Sunday, 12 September, 2010, 12:00am

The mainland's consumer price index, a major gauge of inflation, hit a near-two-year high in August, but economists do not expect the rise to prompt further fiscal tightening by Beijing such as an increase in interest rates.

The consumer price index (CPI) was up 3.5 per cent from a year earlier, compared with July's 3.3 per cent, suggesting prices rose the most since October 2008, data released by the National Bureau of Statistics showed.

Industrial value-added output growth accelerated to 13.9 per cent year on year in August from July's 13.4 per cent growth, the statistics agency said on its website yesterday.

Fixed-assets investments reached 14.1 trillion yuan (HK$16.2 trillion) in the first eight months this year, a year-on-year increase of 24.8 per cent, fractionally lower than that for the first seven months.

The data could cause some to question whether the government may respond with further fiscal tightening. When officials brought forward the release of last month's data by two days to yesterday, some people speculated that the government could be paving the way for an announcement of higher interest rates.

The government yesterday dismissed such speculation, saying it was merely trying to release the data as early as possible.

Bureau spokesman Sheng Laiyun said the government could still achieve its annual target for consumer price inflation of 3 per cent, since the rise in the CPI in August was mainly a consequence of price rises for agricultural produce.

Most economists agreed, saying they expected price rises would ease in the coming months as food prices were temporarily boosted by flooding and other adverse weather.

Tom Orlik, a China analyst with Stone and McCarthy Research Associates, said he saw little in last month's data to suggest a change in current policy.

'The growth data, with its evidence of a very moderate slowdown, will certainly not be keeping policymakers awake at night,' Orlik said.

Qu Hongbin, chief China economist and co-head of Asian economic research at global bank HSBC, said last month's data broadly confirmed that resilient domestic demand warranted a soft landing, implying no need for a policy U-turn.

Qu said inflation was not the key risk and there was no need for further tightening via rate hikes for the rest of the year.

He said a closer examination revealed that volatile food prices were a key contributor to the rise in the index, with the food component up 7.5 per cent year on year in August, from 6.8 per cent in July. Non-food prices remained subdued.

'It appears that it is an increase in pork production, rather than a hike in interest rates, that is required to deal with China's current bout of price pressure,' Orlik said.

Qu said that while he believed Beijing would retain its tight policy stance in the coming months, the need for significantly more aggressive tightening measures remained low.

Retail sales in August were up 18.4 per cent year on year, compared with a 17.9 per cent year-on-year increase in July.

Orlik said that, taking account of a higher reading on the CPI, real growth was actually a rather unimpressive 14.9 per cent.

He said retail sales growth was also supported by another surge in car sales, as dealers slashed prices to clear unwanted stocks.

The producer price index, a gauge of factory-gate prices, was up 4.3 per cent year on year, a drop from the 4.8 per cent year-on-year increase in July and slightly below the consensus expectation.

Eating away

The rise of the consumer price index in August was due largely to food prices, which rose by: 7.5%