By Dong Zhixin (Chinadaily.com.cn)
Updated: 2007-08-13 14:20

Consumer price inflation in China accelerated to the highest level in more than 10 years as food prices continue to rise, official figure released on Monday showed, raising the pressure for the fourth interest rate hike this year.

The Consumer Price Index (CPI), a barometer of inflation, grew 5.6 percent in July, after a 4.4 percent rise in the previous month, the National Bureau of Statistics said in a statement on its website.

By contrast, Producer Product Index (PPI), a measure of inflation at the wholesale level, slowed down to 2.4 percent in July from June's 2.5 percent, the bureau said on Friday.

In a breakdown of July's CPI figure, food prices jumped 15.4 percent, while non-food items rose only 0.9 percent, the statement showed.

Among foodstuffs, meat and meat products reported the biggest jump, up 45.2 percent, followed by a 30.6 percent increase in eggs and a 30.1 percent rise in cooking oil. Grain prices went up 6.0 percent.

In July, the rural areas saw 6.3 percent price increase, compared with 5.3 percent for the urban areas, according to the bureau.

Inflation risks were on the rise, the central bank admitted in its second quarter monetary report on Wednesday. It vowed to take necessary measures to keep the basic stability in prices.

China has raised interest rates three times so far this year, with the latest coming on July 20 when the benchmark one-year deposit rate rose to 3.33 percent. That rate hike is coupled with a reduction of interest tax on bank deposits to five percent from 20 percent.

However, the return on deposits is still below the inflation rate, indicating a loss of purchasing power if people put their money into banks.

That is encouraging an exodus of bank deposits to the country's red-hot stock market, which has soared 77.53 percent so far this year on top of a 130 percent rally in 2006, fueling concerns of bubbles building in the market.

In response, analysts expect the central bank to raise the interest rates again in the coming months to turn the real interest rate positive, partly to offset the impact of rising prices and partly to curb the flow of money into the equity market.

Price hike, especially in foodstuffs, is very sensitive in China as the Chinese has a relatively low disposable income and food accounts for a major part in people's daily spending. In 2006, the disposal income for urban residents stood at 11,759 yuan, and at 3,587 yuan for rural residents.

NDRC, the country's top price regulator, has ordered a crackdown on the manipulation of food prices, after several industry associations and firms announced plans to raise prices, including instant noodles and Chinese fast-food chains.

Meanwhile, the Ministry of Civil Affairs raised the urban minimum living allowance for low-income families by 15 yuan a month.

The State Information Center (SIC), a think-tank under the National Development and Reform Commission (NDRC), agreed on the mounting price hike pressure, but sought to play down concerns over full-scale, significant inflation in a report on Friday, citing stable prices of manufactured products.

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Lu Zhongyuan of Development Research Center of the State Council echoed SIC's point. In the first six months, the core CPI, excluding food and energy, rose a mere 0.9 percent, indicating the inflation is running at a low level, Lu said.

The rationale behind using core CPI instead of CPI is that food and energy prices are vulnerable to changes in weather and international political situations and is not a good reflection of substantial change in demand and supply.

However, the central bank suggests close attention be paid to food prices as, unlike in developed countries, food accounts for 34 percent of China's CPI.

The State Information Center put the CPI growth in the third quarter at 4.3 percent, up from 3.2 percent for the first half of this year, while anticipating the growth slow down in the fourth quarter as food prices will gradually fall due to greater supplies.