China's inflation at three-year high

China's annual inflation accelerated to a three-year high in June, increasing the chances that the central bank will keep raising interest rates to tame price pressures that are spreading beyond food and energy. Saturday's data, which comes just three days after China raised interest rates for the third time this year, may prove to be the near-term peak for China's inflation as global commodity prices cool, but most economists were still pencilling in one more rate increase this year.
The consumer price index for June rose 6.4 percent from a year earlier, slightly above economists' forecasts for a 6.3 percent increase, with sharp rises recorded in food, consumer goods and property. "We expect the central bank to raise interest rates once more in the fourth quarter, as it did last year, to help prevent inflationary pressures from spilling over into next year," said Qiao Yongyuan, an analyst at CEBM in Shanghai.
Qiao noted record pork prices, a key driver of China's food inflation in recent months, are unlikely to ease anytime soon - a view shared by pork producers due to a pig shortage. China's inflation data has become its most closely-watched indicator in recent months as investors look for clues on whether Beijing is about to shift its policy stance after nine months of steady tightening. With the US and eurozone economies sluggish, China is one of the world's most powerful growth engines, and investors worry Beijing may jeopardise that by tightening policy too far.
But analysts who argued Beijing is likely to keep raising rates noted China's economy is only slowing gently and is still seen growing by more than 9 percent in 2011. Given that, they say stubborn inflation is the bigger risk right now. China's inflation-adjusted interest rates are still negative. That encourages savers to funnel their money into other asset such as property instead of parking it in the bank, which can exacerbate price pressures, said Cui Yong, an economist with GF Securities in Beijing.
Cui expects China's central bank to raise rates once more this year. A slim majority of analysts surveyed by Reuters this week thought China would raise rates once more this year before standing pat until June 2012. In June, pork prices alone lifted China's consumer price index by 1.4 percentage points, soaring more than 57 percent. Egg prices also jumped a steep 23 percent on the back of a seasonal squeeze in supply.