China's Inflation Quickens to Fastest in 11 Years

Bloomberg's report about China's inflation in 11 years:

China's inflation accelerated to the quickest pace in more than 11 years after the worst snowstorms in half a century disrupted food supplies.

Consumer prices rose 7.1 percent in January from a year earlier, the statistics bureau said today, after gaining 6.5 percent in December. That was more than the 7 percent median estimate of 23 economists surveyed by Bloomberg News.

Accelerating inflation adds to evidence the world's fastest-growing major economy is at risk of overheating after the trade surplus rose more than forecast and money supply grew at the quickest pace in 20 months. Interest-rate increases risk triggering a sudden slowdown as U.S. demand for exports weakens and the blizzards curb first-quarter production.

``The economy faces a serious short-term inflationary threat,'' said Stephen Green, senior economist at Standard Chartered Bank Plc in Shanghai. ``The central bank will have to move on rates before too long.''

The yuan traded at 7.1540 versus the dollar at 10:35 a.m. in Shanghai from 7.1544 before the data. The yield on a two-year bond didn't change.

Food prices jumped 18 percent in January from a year earlier and non-food prices rose 1.5 percent. Pork soared 59 percent, edible oil 37 percent and vegetables 14 percent. Those increases add to the risk of social unrest in a nation where 300 million people live in poverty, according to the World Bank.

Inflation Tools

The impact from the snowstorm's disruptions may be more pronounced in February's data because of the extra eating associated with this month's Lunar New Year celebrations.

Central banks across Asia face the choice of tackling slowing growth or rising inflation. Lehman Brothers Holdings Inc. last week cut its forecast for 2008 growth in the region, excluding Japan, to 7.3 percent from 7.6 percent and raised its inflation estimate to 4.6 percent from 4.2 percent.

``China's central bank has relaxed monetary policy a bit but it will be forced to tighten again because inflation will go higher and outweigh concerns on economic growth,'' said Ma Jun, chief China economist at Deutsche Bank AG in Hong Kong. ``We are looking for two more interest-rate increases this year.''

China's economy, the world's fourth largest, may grow 10 percent this year, according to the International Monetary Fund, down from 11.4 percent in 2007, as export growth weakens.

The financial system is flooded with cash from record trade surpluses, threatening to stoke inflation that has soared since last year on food and fuel. The surplus jumped 23 percent in January from a year earlier to $19.5 billion, even as the U.S. appetite for Chinese goods weakened. Money supply rose 18.9 percent.

Shuttered Factories

Snowstorms from mid-January closed factories and boosted prices by destroying crops and disrupting deliveries.

Accelerating producer prices show pressure for inflation to stay high. Producer prices, the cost of goods as they leave the factory, jumped 6.1 percent in January, the biggest gain in more than three years, on oil and raw materials.

Currency gains and curbs on bank lending may be favored this year as tools to curb inflation, according to Sun Mingchun, an economist at Lehman Brothers in Hong Kong. The government has also imposed food and energy price controls.

So far, the government is letting the yuan gain at a faster pace versus the dollar than it did last year. The currency has climbed nearly 2 percent after rising 7 percent in 2007. A stronger currency would push up the price of exports and make imports cheaper.

Economists expect the government to keep raising banks' reserve requirements, a Bloomberg News survey last month showed. The central bank has ordered lenders to set aside more deposits as reserves on 11 occasions since the start of last year, pushing the ratio to 15 percent, the highest ever.

Economists are split on whether interest rates will rise this year after six increases in 2007, the survey showed.

January's consumer prices climbed 1.2 percent from December.

[Bloomberg]