Inflation could dip to 7.5 percent in the second quarter from 8 percent in the first, but inflationary pressures will stay strong because of surging grain prices and robust investment, said a top government think tank.
"Seasonal changes and government measures to boost agricultural supplies may cause consumer prices to slide in the second quarter," the State Information Center said in a report. "But inflationary pressure is still mounting because of domestic and international factors."
The Beijing-based think tank falls under the National Development and Reform Commission.
The government is trying to limit consumer inflation under 4.8 percent in 2008 but the consumer price index gained 8.7 percent in February, the highest in 12 years.
"The ongoing price surge of agricultural products in international markets will add to the inflationary pressure in China," the center warned.
Prices of food, which makes about a third of China's CPI basket, is key for the government to tame inflation as it accounted for about 70 percent of the inflation last year.
Global agricultural prices climbed 14.6 percent in the first quarter, according to the Ministry of Commerce. Rice prices have more than tripled to $1,000 per ton in the past year.
China, largely self-sufficient in grains, is trying to stabilize domestic rice prices with measures such as export bans and agricultural subsidies. But there are concerns about how long the nation can hold its rice price at about one-fourth of that in overseas markets, given recent reports of illegal rice exports in the past months.
The center also said China is under growing pressure to raise domestic grain prices due to a demand-supply gap and mounting agricultural production costs from fertilizer and fuel.
Zhou Xiaochuan, governor of central bank, had anticipated inflation to ease after the lunar New Year this February. But he didn't predict the full-year outlook given the uncertainties in grain and commodity prices, according to Reuters.
The think tank said investment in China would remain strong in the second quarter thanks to ballooning corporate profits and local officials' appetite for investments after a personnel reshuffle in the beginning of the year.
Prices of investment goods such as machinery and equipment gained 8.6 percent in the first quarter, compared with 4.7 percent in 2007, the center said, adding the price rise will continue in the second quarter as the investment momentum will continue.
The center also forecast China's economy will expand by 10.8 percent from March to June, up 0.2 percentage points from the first quarter.