China's inflation hits 11-year peak

By Jason Subler

BEIJING (Reuters) - Chinese consumer inflation rate surged in January to an 11-year high of 7.1 percent and looks set to rise further, cementing expectations that Beijing will stick to a tight monetary policy despite softening economic growth.

Many economists said inflation was likely to intensify, even as the impact of recent fierce weather fades, because of rapid money growth and rising raw material costs that have not yet been passed on to the consumer.

Mounting popular concern over inflation poses a stiff policy challenge for China's leaders, who want to use the Olympic Games in August to showcase Beijing's economic stability.

"The acceleration in money and credit growth in January suggests that inflation is likely to have further legs to run," Hong Liang and Yu Song, economists with Goldman Sachs in Hong Kong, said in a note to clients.

They said February's consumer price index (CPI) was likely to rise by much more than 7 percent, compared with a year earlier, and may approach double digits.

"Therefore, we believe it is far too early to expect any policy loosening in China. To the contrary, policy makers in China will likely try to tighten monetary policy further, with more reserve requirement ratio hikes, faster yuan appreciation, and more heavy-handed controls over bank lending," they said.

The rise in January's CPI, up from 6.5 percent in December, was in line with market forecasts and was the highest since September 1996. Other Asian countries are also grappling with rising prices. Inflation in Singapore is at a 25-year high.

VERY TRICKY

Food, which makes up one-third of China's consumer basket, cost 18.2 percent more in January than a year earlier after rising 16.7 percent in the year to December, according to the National Bureau of Statistics.

The price of pork, the staple meat for China's 1.3 billion people, was up 58.8 percent from January 2007.

Swine disease, surging feedgrain costs and low prices in 2006 that deterred farmers from rearing hogs are behind the spike, which has spilled over to other meat and food items.

By no means all economists believe inflation is getting out of control. Mingchun Sun at Lehman Brothers in Hong Kong expects the rate to peak at 7.5 percent in February and to fall to just 1.1 percent in the fourth quarter.

Encouraging this view, non-food inflation rose only modestly to 1.5 percent in January from 1.4 percent in December.

Yao Jingyuan, chief economist at the statistics office, also said inflation would ebb in the second half of the year.

Yao was quoted by the official Xinhua news agency as blaming the rise in inflation on a low base of comparison in 2007, the slightly earlier date this year of the Lunar New Year holidays and the impact of severe winter weather that swept southern China last month.