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Inflation in China hits 11-year high, set to rise further

(BEIJING) China’s inflation rose to its highest level in more than 11 years in January after devastating snowstorms worsened food shortages, according to data reported yesterday, and analysts warned there might be sharper increases to come.

Consumer prices in January climbed 7.1 per cent from the same month last year, driven by an 18.2 per cent rise in costs, the National Bureau of Statistics reported.

Economists warned that despite efforts to ease food shortages, China faces pressure for prices to rise across the board due to higher wages and costs for coal, iron ore and other industrial materials.

February inflation ‘is likely to be much higher than 7 per cent, and might even get close to double-digit levels,’ said Goldman Sachs economists Yu Song and Hong Liang in a report to clients. ‘Inflation is likely to have further legs to run.’

High inflation could complicate Beijing’s efforts to keep the fast-growing economy from overheating and add to pressure to let the exchange rate of its currency, the yuan, rise faster.

Surging food costs are a political concern for Chinese leaders because they hit the poor majority hard in a society where families spend up to half their incomes on food. Bouts of high inflation in the 1980s and 1990s sparked protests, which the government hopes to avoid repeating.

Economists expect interest rate hikes this year but say they should be modest because the key factor driving inflation is shortages of pork and some other food, rather than too much credit.

Beijing has nudged up rates over the past two years to cool a lending boom. But it faces the dilemma that more rises at a time when US rates are falling could attract money from abroad, adding fuel to the boom.

 

Source: AP (Business Times 20 Feb 08)

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