China's February prices rise faster than expected

[March 11, 2011]  BEIJING (AP) -- China's consumer prices rose sharply again in February despite government efforts to cool surging inflation that communist leaders worry might fuel unrest.

The announcement Friday came after Beijing promised sweeping efforts this week to improve life for China's poor majority with higher wages and subsidies. Inflation could undercut that campaign by eroding the public's economic gains.

Inflation remained elevated in February at 4.9 percent, exceeding analysts' forecasts and above the government's 4 percent target for the year. Food price inflation unexpectedly accelerated to 11 percent from January's 10.3 percent rate.

Inflation is likely to climb above 5 percent next month, then decline in the second half of the year, said Galaxy Securities economist Zhang Xinfa in Beijing. But Zhang said the outlook was unclear because Middle East turmoil, high oil costs and a possible weakening of the U.S. dollar might push inflation still higher.

"If you look at both the political situation in the OPEC countries and the future trend of the U.S. dollar, you see a lot of uncertainty for Chinese inflation," Zhang said.

Inflation, especially in food prices, is dangerous for China's leaders because it erodes economic gains that underpin the Communist Party's claim to power. Poor Chinese families spend up to half their incomes on food.

Communist leaders have declared fighting inflation a top priority and repeatedly assured the public the problem is under control.

But economists expect more sharp price rises this year because China faces a problem it cannot quickly fix: Demand is outstripping food supplies, while high global commodity prices mean it can't fill the gap cheaply with imports.

At a news conference held as part of this week's annual meeting of China's legislature, central bank governor Zhou Xiaochuan said inflation is stable, though at a "relatively high level."

Zhou ruled out major changes in credit or exchange rate policy. Analysts say Beijing has fueled inflation by keeping interest rates too low and could cut import costs by letting its tightly controlled currency rise faster against the dollar.

"The main instrument for managing inflation is not the exchange rate regime," Zhou told reporters. He added later: "When we make adjustments to interest rates we cannot think about the consumer price index only. We have other objectives, such as the impact on liquidity in the market."

Still, the sharp price rises increased the likelihood of new rate hikes as soon as next week after the legislature session ends, said Credit Suisse economist Dong Tao. The central bank already has raised rates three times since October.

"Inflationary pressure is still acute in China," Tao said in a report. "This probably has surprised the decision makers in Beijing."

Nonfood inflation in February was a relatively low 2.3 percent, but analysts say price pressures are likely to spread beyond food. Producer prices rose 7.2 percent, suggesting consumers might face more price hikes as suppliers pass on higher costs.

Demand has been fueled by economic growth that hit 10.3 percent last year. The expansion is slowing as Beijing curbs its lending boom but the International Monetary Fund has forecast 9.6 percent growth this year.

Beijing has tried to mollify the public by paying food subsidies to poor families and ordering local leaders to see vegetable markets have adequate supplies.

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Online:

China National Bureau of Statistics (in Chinese):
http://www.stats.gov.cn/

[Associated Press; By JOE McDONALD]

Associated Press researcher Zhao Liang contributed.

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