• Thu
  • Nov 27, 2014
  • Updated: 2:37am

Inflation surge as food bills hit roof

PUBLISHED : Sunday, 10 July, 2011, 12:00am
UPDATED : Sunday, 10 July, 2011, 12:00am
 

Big increases in food costs sent inflation on the mainland spiralling to a three-year high last month.

The consumer price index (CPI) rose to 6.4 per cent, up sharply from the 5.5 per cent in May and well above the government's annual target of 4 per cent, the National Bureau of Statistics said yesterday.

The index is at its highest level since June 2008, when it hit 7.1 per cent. The higher-than-expected reading came after Premier Wen Jiabao said last month that he was confident inflation would slow down later this year.

Food prices, which account for nearly one-third of the basket of goods in the mainland's CPI calculation, rose 14.4 per cent last month from the same period last year. They rose 11.7 per cent in May.

Pork prices surged 57.1 per cent year on year, contributing 1.4 percentage points to headline CPI inflation.

Non-food inflation increased slightly to 3 per cent from 2.9 per cent in May, the statistics agency said.

However, economists said the latest inflation figure did not mean Beijing's fight against inflation had failed, as it was predicted inflation would peak before starting to subside in the following months. The government has made capping rising prices its top priority, fearing inflation could trigger social unrest.

It has stepped up a series of tightening measures since last year, with the central bank raising banks' reserve requirement ratio (RRR) six times in the first half of this year. Banks must now keep a record-high 21.5 per cent of their deposits in reserve to rein in excess lending.

It has also raised interest rates five times since October - most recently on Wednesday.

People's Bank of China governor Zhou Xiaochuan said on Friday that taming inflation would remain the bank's top priority.

Meanwhile, the National Development and Reform Commission earlier this year ordered major food manufacturers and associations to keep food prices stable.

Despite the high CPI, analysts said, the government might not tighten its monetary policies further, such as by raising interest rates again in the second half of the year.

Lu Ting, China economist with Bank of America-Merrill Lynch, said he saw the higher-than-expected CPI as positive news for the market as it suggested that inflation had most likely peaked last month.

Qu Hongbin, HSBC chief economist for Greater China, agreed.

'Thanks to surging food prices, sequential CPI growth has strengthened. However, non-food CPI has peaked and stabilised. We believe China's headline inflation has peaked,' Qu said.

According to Lu, in July last year the CPI and food prices rose 0.4 per cent and 0.9 per cent respectively, so back-of-the-envelope calculations show that if month-on-month CPI this month rises by less than 0.4 per cent, then headline year-on-year CPI inflation will be below last month's 6.4 per cent.

'We expect CPI inflation to fall steadily after June to about 4.0 to 4.5 per cent at the end of the year, and then will stay there for a couple of years,' he said.

He added he believed 'the chance for a further rate increase this year is very small - room for more RRR raises is also quite limited'.

Qu said: 'This, plus slowing growth, implies less need for a further intensification of tightening,' though he expected two more reserve ratio increases but no rate increase before the current tightening cycle ended by September.

Yu Song and Michael Buchanan, economists with Goldman Sachs, said they expected the CPI this month to remain elevated, but that it might fall from August onwards because of 'the slowing activity growth', a result of domestic policy tightening and moderation in external demand growth.

Last month, Wen assured the world that the Chinese economy would continue to grow despite Beijing's tightening measures, amid concern that any possible stagflation in the world's second-largest economy would slow global recovery.

The statistics bureau is scheduled to release other major data on economic activities, such as industrial production and fixed-asset investment, on Wednesday.

The producer price index, a major measure of inflation at the wholesale level, rose 7.1 per cent last month year on year, up from the 6.8 per cent increase in May, the bureau said.

6.2%

The level at which inflation would peak and stabilise, according to a report on Wednesday from China Construction Bank

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