China’s inflation jumps to nearly 12-year high

/ Source: The Associated Press

China's inflation surged to a nearly 12-year high in February, the government said Tuesday, squeezing exporters and adding to the threat of unrest ahead of the Beijing Olympics.

The 8.7 percent rise in the consumer price index over February 2007 was driven by a 23.3 percent jump in food costs, the National Bureau of Statistics reported. Price rises for some individual goods were even more dramatic: Pork was up 63.4 percent and vegetables 46 percent.

Communist leaders worry about a possible backlash in a society where the poor majority spend up to half their incomes on food. Bouts of high inflation in the 1980s and '90s sparked protests.

"I think there's a high risk of popular demonstrations," said Robert Broadfoot, managing director of Political and Economic Risk Consultancy Ltd. in Hong Kong.

Premier Wen Jiabao said last week taming inflation was Beijing's top priority and set a target of 4.8 percent this year — a goal that analysts said looked unrealistic after Tuesday's announcement.

Deutsche Bank raised its forecast for full-year inflation from 6.4 percent to 7.2 percent. Morgan Stanley raised its forecast by two full percentage points to 6.5 percent.

"Stronger expectations of higher inflation could lead to stockpiling and panic buying, which may lead to an inflation spiral," Deutsche Bank economist Jun Ma said in a report to clients.

Non-food inflation stayed low in February, with prices up 1.6 percent from the year-earlier month.

But wholesale data reported earlier show pressure for across-the-board price rises is growing. The cost of basic oil products jumped 37.5 percent in February while that of steel products was up 29.6 percent. Food-related raw materials rose 11 percent.

Such increases are squeezing exporters that have been hammered by a steady rise in China's currency, the yuan, over the past 2 1/2 years that has made their goods less attractive abroad.

Some factories in the export-driven southeast have closed, wiping out thousands of jobs. Others are struggling to stay competitive with foreign rivals by switching to new products.

Rising prices for iron ore and other materials will squeeze company profits, raising doubts about their growth prospects, said Jing Ulrich, JP Morgan's chairwoman for China equities.

"The beneficiaries of higher inflation remain the resource suppliers — many of which are outside China," Ulrich said in a report.

Prices began to climb in mid-2007 due mostly to shortages of pork, China's staple meat, and grain.

Authorities froze prices of gasoline, electricity and other basic goods in September and said inflation should fall once the autumn grain crops were harvested. But instead of easing, the inflation rate has risen steadily in recent months.

The government responded by ordering food processors in January to get official approval for any price hikes. Fertilizer prices were frozen to protect farmers and curbs imposed on grain exports to increase supplies in domestic markets.

February inflation was China's highest since May 1996, when prices rose by 8.9 percent, according to Goldman Sachs. It was up sharply from January's percent 7.1 percent rate.

Economists say inflation should stay high possibly as late as May before it begins to ebb.

Beijing has raised interest rates repeatedly and is trying to boost food production to ease inflation pressure amid a boom that saw economic growth rise to 11.4 percent last year.

Those efforts were hampered when the worst snowstorms to hit China in five decades blanketed the south in January and early February. The snows wrecked crops, killed farm animals and paralyzed shipping. Prices of meat and vegetables soared in snow-hit areas.

Rapid growth in the total pool of money available for credit also added to pressure for prices to rise, Goldman economists Yu Song and Hong Liang said.

Inflation should stay high "even after the temporary weather-related impact dissipates," they said in a report.

Song and Liang said they expect Beijing to respond by raising interest rates, curbing bank lending and allowing the yuan to rise faster. That could help to cool inflation by narrowing China's swollen trade surplus and reducing the amount of cash flooding into the economy.