China's Inflation Quickens to Fastest in 11 Years

China's Inflation Quickens to Fastest in 11 Years

Feb. 19 (Bloomberg) -- China's inflation accelerated to the quickest pace in more than 11 years after the worst snowstorms in half a century disrupted food supplies.

Consumer prices rose 7.1 percent in January from a year earlier, the statistics bureau said today, after gaining 6.5 percent in December. That was more than the 7 percent median estimate of 23 economists surveyed by Bloomberg News.

Food prices soared 18 percent after blizzards paralyzed transport systems and destroyed crops, stoking the risk of social unrest in a nation where 300 million people live in poverty, according to the World Bank. The government faces the challenge of curbing inflation without derailing the expansion of the world's fastest-growing major economy.

``Inflation is likely to have further legs to run even after the snowstorm effects subside because of fast growth in money supply,'' said Liang Hong, senior economist at Goldman Sachs Group Inc. in Hong Kong. February's rate ``might even get close to double-digit levels.''

The yuan traded at 7.1538 versus the dollar at 1:27 p.m. in Shanghai from 7.1544 before the data. The yield on the benchmark two-year bond didn't change.

Snowstorms in provinces including Zhejiang and Guangxi killed 107 people and caused 111 billion yuan ($15.5 billion) of damage, the state-run Xinhua News Agency reported Feb. 13.

Pork, Cooking Oil

Pork climbed 59 percent, edible oil rose 37 percent and vegetables jumped 14 percent. Inflation has soared since last year on food and fuel costs and a surging money supply poses the risk of broader price gains. Non-food prices rose 1.5 percent.

Economists are split on whether interest rates will rise this year after six increases in 2007, a Bloomberg News survey showed last month. The key one-year lending rate is 7.47 percent.

``The economy faces a serious short-term inflationary threat,'' said Stephen Green, senior economist at Standard Chartered Bank Plc in Shanghai. ``The central bank will have to move on rates before too long.''

Raising rates when the U.S. Federal Reserve has been cutting them may attract unwanted money from abroad into the Chinese economy. Higher borrowing costs would also be an extra drag on growth when China faces lost production from the snowstorms and the prospect of weakening export demand as a recession looms in the U.S.

Faster February Inflation?

The world's fourth-largest economy may grow 10 percent this year, according to the International Monetary Fund, down from 11.4 percent in 2007.

Deutsche Bank AG and China International Capital Corp. expect a higher February inflation rate. The snowstorms' impact on prices may be more pronounced this month because of feasting at Lunar New Year celebrations.

``Periods of significant social instability in China have always been prefaced by sustained food inflation,'' said Glenn Maguire, Hong Kong-based chief Asia economist at Societe Generale SA. ``Food inflation and its consequences are most acute in low-income rural areas and the inland mega-cities.''

Consumer prices in cities and towns rose 6.8 percent in January from a year earlier while those in rural areas jumped 7.7 percent.

There's pressure for prices to keep rising. Producer prices, the cost of goods as they leave the factory, jumped 6.1 percent in January, the biggest gain in more than three years, on oil and raw materials.

Central Bankers' Choice

Central banks across Asia face the choice of tackling slowing growth or rising inflation. Lehman Brothers Holdings Inc. last week cut its forecast for 2008 growth in the region, excluding Japan, to 7.3 percent from 7.6 percent and raised its inflation estimate to 4.6 percent from 4.2 percent.

China's government may use more currency gains and curbs on bank lending to restrain price increases. It has also imposed food and energy price controls.

So far, the government is letting the yuan gain at a faster pace versus the dollar than it did last year. The currency has climbed nearly 2 percent after rising 7 percent in 2007. A stronger currency would push up the price of exports and make imports cheaper.

Economists expect the government to keep raising banks' reserve requirements, the survey last month showed. The central bank has ordered lenders to set aside more deposits as reserves on 11 occasions since the start of last year, pushing the ratio to 15 percent, the highest ever.

The trade surplus rose more than forecast in January and money supply grew at the quickest pace in 20 months.

January's consumer prices climbed 1.2 percent from December.

BLOOMBERG