China's inflation rate hits 11-year high

By Eadie Chen and Simon Rabinovitch

BEIJING (Reuters) - China's annual consumer price inflation hit an 11-year high in November, with new signs that price pressures are spreading from food to the broader economy, raising the prospect of more aggressive monetary tightening.

The rise in the consumer price index of 6.9 percent from a year earlier -- above the 6.4 percent forecast by economists and up from 6.5 percent in October -- underscored why the government sees the fight against inflation as a priority in the year ahead.

The country's gaping trade surplus is another concern, and separate data released on Tuesday showed that measures to curb exports and promote imports had narrowed it slightly in November.

However, while the $26.3 billion surplus was below October's record $27.1 billion, it was still the third highest ever.

Critics say the surplus is pushed up by an unfairly undervalued currency, a topic that will loom large at high-level Sino-American talks this week in Beijing. The yuan hit 7.3770 per dollar on Tuesday, the highest since its 2005 revaluation.

For now, economists are paying closer attention to inflation, which has been driven up largely by food costs.

In November, food cost 18.2 percent more than a year earlier, but the statistics showed wider price pressures. Annual non-food inflation accelerated to 1.4 percent in November, the sharpest rise this year.

"That's more of a source of concern, an indication that there's more tightness in commodity markets in China and of possible overheating," said David Cohen, an economist at Action Economics in Singapore.

Auto fuel and utilities were both up more than 5 percent from a year earlier after Beijing raised retail fuel prices in November.

"Since we expect continued hikes in energy and national resource prices, the utility component ... will likely continue to be a main contributor to CPI inflation in 2008," Mingchun Sun, an economist at Lehman Brothers, said in a note to clients.

Yao Jingyuan, chief economist of the National Bureau of Statistics, said that full-year inflation was likely to be about 4.7 percent, which would be the highest since 1996.

Last week China's top leaders announced they would shift to a "tight" monetary policy from what they called a decade-long "prudent" stance. Rising consumer price inflation should reinforce their determination, analysts said.

"We expect the central bank to respond to the strong inflation data with additional tightening measures," Yu Song and Hong Liang, Goldman Sachs economists in Hong Kong, said in a note to clients.

On Saturday, China raised banks' reserve requirements by a full percentage point to 14.5 percent. It was the 10th increase this year by the central bank, which has also raised interest rates five times in 2007.

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