December 13, 2010 / 9:30 AM / 9 years ago

ECONOMIC SIGNALS-China inflation rises, but nears peak

BEIJING, Dec 13 (Reuters) - Salvation from inflation lies just over the horizon for China.

Attention is focused for now on the 5.1 percent jump in consumer prices in the year to November, a 28-month high, which was reported on Saturday.

But soon enough, talk will turn to how China can breathe a sigh of relief with price pressures beginning to ease.

As this first chart demonstrates, agricultural price indexes from the commerce and agriculture ministries have been good predictors of the increasing cost of food, which in turn has been the main driver of Chinese inflation.

Both indexes rose in annual terms in November. And right on cue, inflation followed.

But a closer look at the two official food indexes in the above chart reveals a very different picture. Both reached peaks in the middle of last month. While prices remain elevated, the pressure appears to have diminished, at least in the short term.

Monetary tightening — especially, higher reserve requirements and restrictions on bank lending — has no doubt helped. Chinese officials will also cite their administrative efforts to stamp out commodity speculation and control prices.

An equally important factor is base effect. Food prices began to pick up about last year at this time. Barring a supply shock, the higher base of comparison should pave the way for a sustained, if gradual, slowdown in Chinese inflation.

That could reduce the need for interest rate increases. While rates are certainly going to go higher, Beijing may be able to get away without an aggressive course of tightening. (Reporting by Simon Rabinovitch; Editing by Neil Fullick)

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