Inflation persists as food prices soar

PUBLISHED : Wednesday, 15 June, 2011, 12:00am
UPDATED : Wednesday, 15 June, 2011, 12:00am


Mainland consumer inflation in May surged to a 34-month high on the back of soaring food costs, reinforcing expectations that the government may step up measures to curb price growth, particularly in the overheated property sector.

The consumer price index (CPI), the main gauge of inflation, rose 5.5 per cent year-on-year in May, up from a 5.3 per cent rise in April and 5.4 per cent in March, according to data released by the National Bureau of Statistics data yesterday. May's CPI was well above the government's full-year inflation control target of four per cent, and also marked the fastest clip since the index rose 6.3 per cent in July 2008. For the first five months of the year, the CPI rose 5.2 per cent year on year.

According to the statistics bureau, food prices, which account for nearly a third of the basket of goods in the CPI calculation, were 11.7 per cent in May than a year earlier, compared with 11.5 per cent in April.

The world's fastest growing major economy 'is still facing significant inflationary pressure, which will persist for a while', the bureau's spokesman Sheng Laiyun said.

'Inflation is elevated and will even rise to slightly above 6 per cent in June, although the risk for inflation to get out of control is quite small,' said Lu Ting, chief China economist with the Bank of America-Merrill Lynch.

The central government is expected to maintain its tightening measures, making reining in inflation its top priority. After the release of the inflation data, the People's Bank of China announced a half percentage point rise in the reserve requirement ratio for banks.

'Inflation, not growth, remains the top macro risk facing Chinese policymakers,' said Qu Hongbin, chief China economist at HSBC. 'Beijing should keep its foot on the tightening pedal via further reserve requirement ratio and interest rate hikes in the coming months, if not weeks.'

This year alone, the central bank has increased banks' reserve requirements six times and it has raised the benchmark lending and deposit rates twice in the last six months.

Since the beginning of 2010, it has raised benchmark interest rates four times and increased the proportion of deposits banks must keep as reserves 12 times.

'We think the data makes a strong enough case for the People's Bank of China to hike interest rates within this month,' said Wei Yao, a China economist with Societe Generale.

'We believe the government will continue to keep a tight control on money and credit supply at least for one more month from now,' said Goldman Sachs economists, Yu Song and Helen Qiao, in a research note.

Food price rises were responsible for 65 per cent of CPI growth, Sheng said. Growth in non-food prices also accelerated, up 2.9 per cent year on year in May from April's 2.7 per cent.

'As food price inflation rolls over and some price controls continue, we expect headline CPI inflation to moderate to 4 per cent by the end of the year, with the annual average reaching 5 per cent in 2011,' said Tao Wang, chief China economist at UBS Securities.

The producer price index (PPI), the main gauge of inflation at the wholesale level, rose 6.8 per cent in May from a year ago, unchanged from April.

Meanwhile, separate data pointed to a mild slowdown in economic activity, reassuring investors concerned that the world's second biggest economy might be headed for a hard landing. Held back by widespread power shortages and government tightening policies, industrial value-added output growth grew 13.3 per cent year on year in May, the slowest growth since last November.