China's Inflation Exceeds Target, Adding Rates Pressure

China’s inflation exceeded the government’s 2011 target for a fourth month as prices excluding food rose the most in at least six years, escalating pressure on the central bank to keep raising interest rates.

Consumer prices rose 4.9 percent last month from a year earlier after a 4.6 percent gain in December, the statistics bureau said in a statement on its website today. Producer-price inflation quickened to 6.6 percent from 5.9 percent.

“All these numbers indicate that inflationary pressures haven’t abated and China has already entered into an era of structural inflation,” said Liu Li-gang, an Australia & New Zealand Banking Group economist in Hong Kong. “This indicates more monetary policy tightening ahead.”

The acceleration reflects higher rents, a 53 percent surge in money supply the past two years and increasing domestic demand in the world’s second-largest economy. Stocks rose in Shanghai on optimism China’s expansion will diminish the hit to earnings from higher costs and as the January inflation rate was less than economists forecast.

The benchmark Shanghai Composite Index rose 0.6 percent at the lunchtime break, heading for its highest close of the year. Equities have advanced around the world on confidence that the global economic recovery is strengthening, with the MSCI World Index last week reaching levels unseen since 2008.

CPI Modifications

Economists had anticipated a 5.4 percent gain in the consumer price index, according to the median of 27 estimates in a Bloomberg News survey. Alterations to the CPI’s components that took effect last month boosted the rate by 0.024 percentage point, the statistics bureau said.

“The driver of the below-consensus reading is the smaller- than-expected increase in food prices,” said Lu Ting, a Hong Kong-based economist with Bank of America Merrill Lynch.

Food prices climbed 10.3 percent last month from a year earlier, according to today’s report, after gaining 9.6 percent in December. Vegetable prices jumped 2 percent, fruit prices surged 35 percent and grain rose 15 percent, according to the statement. Non-food prices rose 2.6 percent from a year earlier.

Policy makers may front-load monetary-policy tightening in the first half of the year as inflation remains elevated, according to economists from JPMorgan Chase & Co. and Morgan Stanley. The People’s Bank of China has raised its benchmark one-year lending and deposit rates by a quarter percentage point three times since mid-October.

Cost of Renting

Under the revised weightings, the food component declined by 2.21 percentage points and clothing, medical costs and telecommunications were also reduced, the National Bureau of Statistics said today, without giving the new weightings. Residence-related charges, which include rent and utility costs, were increased by 4.22 percentage points, the bureau said.

Food previously accounted for a third of the basket of goods that make up the index and was the main driver of inflation last year.

Residence costs jumped 6.8 percent in January from a year earlier, the most since August 2008, today’s data showed.

The NBS also revised the calculation of the components of the producer-price index, adding about 2000 products to the basket and adjusting the weightings. The change reduced January’s yearly producer-price inflation by 0.05 percentage points, the bureau said, without disclosing a breakdown of the basket.

IMF Warning

Asian economies, with food costs and inflows of capital driving inflation, may need to raise interest rates further to limit the risk of overheating and prevent a “hard landing,” International Monetary Fund Managing Director Dominique Strauss- Kahn said Feb. 1. India’s benchmark wholesale-price index rose 8.23 percent in January, Indonesia’s inflation is 7 percent and South Korea’s is 4.1 percent, the latest government data show.

China’s consumer prices jumped 1 percent in January from December, the third-biggest monthly increase in almost a year, the statistics bureau said today.

“The spillover of price pressures throughout the inflation basket should be a worrying sign for the People’s Bank of China and as a result we expect the recent fast pace of monetary tightening to continue,” said Dariusz Kowalczyk, an economist with Credit Agricole CIB in Hong Kong.

China’s one-year deposit rate, which now stands at 3 percent, has lagged behind inflation for about a year. The government aims to keep consumer price gains within 4 percent this year, state television reported Dec. 14, citing the National Development and Reform Commission.

Lending Surge

In addition to raising rates, the central bank last month asked lenders to set aside more money as reserves for a seventh time since the beginning of last year and intensified a crackdown on property speculation. Still, banks may have handed out more than 1.2 trillion yuan （$182 billion） of new credit in January compared with 481 billion in December as they front- loaded lending, the China Securities Journal reported Feb. 11. New loans were 1.4 trillion in January last year.

Companies from Baoshan Iron & Steel Co. to Starbucks Corp. and McDonald’s Corp. have raised prices. U.S. fast food chain McDonald’s may increase the cost of some meals again in the second half, Tim Fenton, president for Asia, the Middle East and Africa said in a Bloomberg TV interview yesterday.

China may increase retail gasoline and diesel costs as soon as this week to reflect higher international crude prices, Shanghai Daily reported Feb. 11, citing consulting company C1 Energy. The world’s largest rice consumer last week increased the minimum purchasing prices for the 2011 crop by as much as 22 percent to boost stockpiles and increase production.

China became the world’s No. 2 economy last year after Japan’s gross domestic product fell an annualized 1.1 percent in the fourth quarter, the Japanese government said yesterday. The International Monetary Fund estimates the Chinese economy will grow 9.6 percent this year, six times faster than Japan.

（source from：bloomberg）