Agharna blog

China says January inflation remains high at 4.9%

BEIJING (AFP) – China said Tuesday its inflation rate stayed stubbornly high at 4.9 percent in January, sparking analyst predictions that the government would take further aggressive fiscal steps to cool prices.

The consumer price index, the key gauge of inflation in the world's second economy, was "lower than market expectations" according to the National Bureau of Statistics but still above Beijing's four percent full-year target.

A Dow Jones Newswires poll of 15 economists before had forecast 5.4 percent growth.

The figure, which follows a 4.6 percent increase in December and a more than two-year high of 5.1 percent in November, comes despite three interest rate hikes in four months and several increases in the amount of money banks must keep in reserve to cut lending.

Brian Jackson, a Hong Kong-based senior strategist at Royal Bank of Canada, said the reading suggested pressure on prices would remain "uncomfortably strong" for the next few months.

"The policy focus will remain on curbing inflation, and we expect to see another 50 basis points of rate hikes and a faster pace of currency appreciation in coming months," he said.

New monthly lending data also released on Tuesday provided a ray of hope for policymakers.

The value of new loans fell to 1.04 trillion yuan ($158 billion), down about 23 percent year on year.

A torrent of lending over the past two years -- officially encouraged at first as a shield against the 2008 world financial crisis -- has helped spur inflation, and the January data suggested government curbs were having some effect.

But analysts said the overall picture indicated Beijing would need to step up its inflation fight.

Li Huiyong, chief economist at Shenyin & Wanguo Securities Co, wrote in a research note his firm expects two more rate hikes this year and further increases in the bank reserve ratio.

He said authorities also would likely allow a five percent strengthening of the yuan this year. A stronger yuan helps fend off the impact of price rises in imported commodities.

Inflation has become Beijing's top economic concern as it struggles to keep a lid on rising costs of food and other key items to head of public unrest.

The continued high prices came despite an adjustment in the index that lowered the weight of soaring food costs.

"Generally, inflationary pressure remains very high," said Yao Wei, a Hong Kong-based China economist with Societe Generale.

"(The data) cannot change the fact that the general economy is overheating and inflationary pressure is high."

A separate statement on the statistics bureau's website said the weightings are tweaked annually.

Despite the change, food costs continued to show strong growth in January, with grain prices up 15.1 percent, the bureau said.

The grain supply situation has become an increasing source of official anxiety as a drought across northern China over the past four months has raised fears that the important winter wheat crop could be severely affected.

At the same time, prices of fresh fruit grew 34.8 percent, the bureau said.

Inflation, particularly related to food, has a history of sparking unrest in China.

Tuesday's data did not include real estate prices, which also have grown sharply over the past year.

The statistics bureau said the food price weighting was lowered by more than two percentage points.

Yao said that brings food's weighting to less than 30 percent. The weighting of living costs such as utilities was raised by about four percentage points, bringing it near 20 percent, she said.