China's inflation rises to almost 12-year high

By: AP
By: AP

BEIJING (AP) -- China's inflation almost climbed to a 12-year high in April, swamping official efforts to cool surging living costs that could provoke unrest ahead of the Beijing Olympics.

The government, which took further steps Monday to tame the inflation, faces the possibility of more sharp price hikes, some analysts warned.

"Underlying inflationary pressures remain undiminished," Goldman Sachs economists Yu Song and Hong Liang said in a report.

The government ordered banks to increase their reserves for a fourth time this year in a move meant to contain inflation by curbing lending, but it gave no indication whether it would boost interest rates.

April's consumer prices rose by 8.5 percent over the same month last year, the National Bureau of Statistics reported. That was a rebound from March's 8.3 percent rate and below February's 8.7 percent - the highest in 12 years.

Premier Wen Jiabao has said taming inflation is Beijing's priority. The government said in March it hoped to hold price rises to 4.8 percent this year - a target that looks increasingly unlikely.

Inflation jumped in mid-2007 as China ran short of pork, grain and some other food items. The government has assured the public that the country has enough grain and is paying farmers to raise more pigs. But efforts to boost food supplies were disrupted by severe winter storms.

April inflation was driven by a 22.1 percent jump in food prices, including 68.3 percent for pork over the same month last year, 46.6 percent for cooking oil and 13.6 percent for vegetables.

"Recent surges in global grain prices increase the risk that domestic grain prices may lead (to) another wave of food price inflation in the months to come," Lehman Brothers economist Mingchun Sun said in a report to clients.

Beijing has imposed price controls on basic food items. But costs of energy and raw materials are rising, adding to pressure for producers to pass along higher prices to consumers. Producer prices, an indicator of future inflation, rose by 8.1 percent in April.

Chinese families spend up to half their incomes on food, compared with the 5.8 percent of their incomes U.S. shoppers spent on average on food in 2006, according to the U.S. Department of Agriculture.

Rising food prices in China, coupled with surging housing costs, are eroding income gains from an economy that expanded by 10.6 percent in the first quarter.

There have been no reports of demonstrations like those in Bangladesh, Egypt and elsewhere over food prices. But bouts of high inflation in China in the 1980s and 1990s sparked protests - a scenario that the government is eager to avoid as it prepares for the Summer Olympics, meant to showcase China as a prosperous, stable society.

In an effort to curb inflation, the government has hiked interest rates repeatedly and has tried to shrink the amount of money available for lending by forcing banks to set aside more reserves.

The latest order Monday by the central bank boosted the amount of deposits that banks must hold in reserve by 0.5 percentage point to 16.5 percent - the highest to date.

But economists say Chinese bank deposits are growing so fast that such modest reserve increases have no direct impact on lending and are meant as a signal to bankers to reduce credit.

Also Monday, customs data showed China's trade surplus fell by 1 percent in April. That could help to ease inflation pressure by reducing the amount of money flooding into the booming economy.

China's global trade surplus fell to $16.8 billion amid weaker demand for Chinese goods, according to the Chinese customs agency.

The trade surplus with Europe jumped by 34.8 percent to $12 billion while that with the United States saw much slower growth, rising by 4 percent to $13 billion.

The growing Chinese trade gap with the 27-nation European Union has prompted the EU to join Washington in lobbying Beijing to ease currency controls and import barriers.

The surge in exports to Europe is due in part to the rise in the euro against China's currency, the yuan, which makes Chinese goods more attractive to European consumers. The dollar, by contrast, has fallen against the yuan, making Chinese goods more expensive for Americans.

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