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August 10, 2011

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Inflation hits highest level in 37 months

CHINA'S inflation accelerated to a 37-month high in July on surging food costs, making it more difficult for policymakers to balance between price control and economic growth stabilization.

Some analysts said July's figure will be the peak for this cycle of inflation, and policies can't be tightened further amid worsening global liquidity.

The Consumer Price Index, the main gauge of inflation, soared 6.5 percent from a year earlier last month, the National Bureau of Statistics said yesterday. It compared with June's pace of 6.4 percent, and increased 0.5 percent on a month-on-month basis.

China's inflation rate has been breaching the government target of less than 4 percent in each of the first seven months. For 2011 so far, the CPI has gained 5.5 percent.

"July's rise was higher than our expectation," said Jing Ulrich, managing director at J.P.Morgan. "But we still think it will be a peak and prices will grow slower in the coming months with stabilizing pork supply and cooling commodity prices on a weak global market."

Food costs jumped 14.8 percent year on year in July, up from June's 14.4 percent. Pork costs continued to climb with an annualized growth of 56.7 percent. But it moderated very slightly from June thanks to abating pork costs in the last week of July.

Lian Ping, chief economist at the Bank of Communications, said there have been signs of easing inflationary pressure, and policymakers had better give up plans of more monetary tightening.

"Inflation rate may start to moderate in August and return to around 4 percent at the year end," Lian said. "China's tightening policies have yet to take full effect, so there is no need to make further moves such as another interest rate increase, especially under a market already short of liquidity."

Xinhua news agency said last Tuesday that China may raise interest rates again this week, and Lu Zhengwei, an analyst at the Industrial Bank, also predicted an interest rate increase in August.

Yao Wei with the Societe Generale said, "This is the kind of data that should trigger an interest rate rise, but the turmoil in global financial markets will probably delay the action."

To deal with the stubbornly high inflation, China has lifted interest rates three times this year, along with raising the reserve requirement ratio six times.

Such a tightening stance has made it difficult for companies to get loans, especially small and medium-sized firms of which credit is their lifeline.

Costs at the factory gate are also picking up. The Producer Price Index swelled 7.5 percent from a year earlier in July, up further from 7.1 percent a month earlier.

China's gross domestic product expanded 9.5 percent year on year in the second quarter, slightly slower than the first quarter's 9.7 percent and last year's 10.3 percent. Some analysts expect a big slowdown in the second half of this year.



 

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