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CPI Rises to 7.1%, Worst in 11 Years

Rising food prices pushed up inflation to an 11-year high in January, dampening speculation that the government might ease its austerity measures.

The consumer price index (CPI), the main yardstick to measure inflation, grew 7.1 percent year-on-year in January, after rising 6.5 percent in December, the National Bureau of Statistics said yesterday.

Food prices, which account for one-third of the CPI basket, surged 18.2 percent in January, led by a 58.8 percent and 41.2 percent year-on-year rise in pork and poultry prices.

The worst snowstorms to hit central and southern China could have played a vital role in the price rises because inclement weather destroyed crops and disrupted transport in a large part of the country.

Official statistics show the snow has affected about half of the country's total winter rapeseed crop and one-third of the winter vegetables.

"The impact of the snowstorms on inflation may not have been fully reflected" yet, Goldman Sachs economist Liang Hong said. She feared February's CPI growth could "get close to the double-digit level".

Producer price of goods - their cost when they leave a factory - jumped 6.1 percent last month, the biggest growth in more than three years. The figure is seen as a harbinger of CPI rise because producers pass the extra cost onto consumers.

"The record CPI could revive the tightening stance of policymakers," Citigroup economist Shen Minggao said, and expected the central bank to raise the interest rate again in the first quarter.

China raised its interest rate six times last year and ordered domestic lenders to set aside more cash as reserves on 10 occasions. The moves were aimed at cooling down the economy and reining in inflation.

Lehman Brothers' Sun Mingchun said inflation would start easing next month as movement of traffic on the country's major expressways gets normal.

Some economists said earlier the government may loosen its austerity drive this year because of a slowdown of the world economy triggered by the US subprime crisis.

But Liang said: "On the contrary, policymakers are likely to try to tighten monetary policy further, with more reserve requirement ratio hikes, faster yuan revaluation, and more heavy-handed controls over bank lending."

The revaluation of the yuan has accelerated since November, because the government can use it to reduce its cost for fuel and raw materials, analysts say.

The yuan rose about 1.6 percent against the US dollar in January, the fastest monthly gain since China de-pegged it from the greenback in favor of a basket of currencies, including the euro, yen and the dollar in 2005.

(China Daily February 20, 2008)

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