CHINA> Exclusive
CPI rebounds to highest level in 11 years
By Dong Zhixin (
Updated: 2007-11-13 10:45

Consumer inflation in China rebounded to its highest level in 11 years on rising food prices, official figures released on Tuesday showed, increasing the possibility for the sixth interest rate hike this year.

The Consumer Price Index (CPI) rose 6.5 percent in October from a year earlier, the National Bureau of Statistics (NBS) said in a statement on its website. The gauge eased to 6.2 percent in September from 6.5 percent in August.

Facing rising inflation, the central bank may raise interest rate further, analysts said. "Another interest rate hike may come as early as this weekend," Professor Guo Tianyong of Central University of Finance and Economics told

Food prices were the biggest driver of the accelerating inflation, jumping 17.6 percent from the same period last year.

Among food items, pork witnessed the biggest increase, shooting up 54.9 percent, while vegetable prices rose 29.9 percent, 17.9 percentage points higher than the previous month. Nonfood items rose 1.1 percent.

Breakdown of food price increases in October

 Item Grain Cooking Oil   Poultry Pork  Eggs  Aquatic Products   Vegetables  Fruits  Dressings
 Increase  6.7% 34.0%   38.3% 54.9%  14.3%  7.0%  29.9%  8.5%   3.9%

"The key reason behind the rapid growth lies in the increase in food prices, which has a heavy weighting in the CPI," Professor Guo said. Food accounts for 34 percent of the country's CPI.

The consumer inflation for the first 10 months was 4.4 percent, above the official target of three percent, the NBS said. For the whole of 2007, the figure might be around 4.5 percent, the People's Bank of China (PBOC) estimated in a report last week.

Another indicator of inflation, the Producer Price Index (PPI) increased 3.2 percent in October from the same period last year, the fastest growth in nine months, the NBS said on Monday.

Inflation may accelerate further

"There is a lot of inflationary pressure," Guo continued. He expects the CPI to accelerate further, citing the increase in fuel prices and tighter grain supply.

The National Development and Reform Commission (NDRC) raised the price of major oil products by 8 percent earlier this month in the face of surging prices of crude oil in the global market.

That might force the transportation, service and other sectors to pass on the rising costs to consumers, Guo explained.

"The CPI may reach seven or eight percent soon," he said. However, the surplus productivity in the manufacturing sector might help reduce the price pressure, Guo added.

Interest rate hike

He urged regulators to shun from frequent price increases, especially utilities, to prevent the further increased pressure.

The central bank should use tightening measures to cool down consumers' inflation anxiety, Guo said. Their concerns could lead to a rush on consumer goods, thus pushing up prices.

So far this year, the PBOC has increased interest rates five times, with the latest happening on September 15, when the one-year savings rate rose to 3.87 percent.

However, the rate of return from bank deposits is still less than the inflation rate, suggesting an erosion of purchasing power for consumers. That sparked an exodus of money from banks to the stock market, whose index has almost doubled so far this year, even after a major correction in the past month.

Money Supply

Another factor that added to the pressure of another interest rate increase was the runaway growth in money supply and bank loans.

In October, the country's broad measure of money supply, or M2, increased by 18.5 percent, while the banks offered 136.1 billion yuan in new renminbi loans.

In theory, a rate hike could help curb the demand for loans as it increases the cost of capital, and in turn reduce the money supply.

The rapid increase in money supply is due in part to the surging trade surplus, which forced the PBOC to issue more yuan to buy the foreign currency.

Trade Surplus

China's trade surplus in October jumped to an all-time high of US$27.05 billion, the General Administration of Customs said on Monday, bringing the total in the first 10 months to $212.37 billion. The previous monthly record of $26.9 billion was set in June.

To mop up the liquidity, the central bank announced during the weekend the commercial banks must put 13.5 percent of their deposits in the PBOC as reserves. That marked the highest level ever and the ninth increase this year.

The ratio might reach 15 percent in 2008, the Industrial and Commercial Bank of China (ICBC) said in a recent report.

In addition to increasing the liquidity pressure, the booming trade surplus also gave more ammunition to other countries demanding faster appreciation of the Chinese currency.

The European financial ministers urged China to allow the yuan value to rise faster in a meeting on Monday in Brussels, earlier reports said. They would raise the case during the European Union-China Summit in Beijing scheduled for November 28.

On Monday, the PBOC set the yuan central parity rate against the greenback at 7.4140, the highest since July 2005 when China ended its peg to the dollar.

The new midpoint marked an increase of 5.88 percent so far this year, and a rise of more than 10 percent in over two years.