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The Spokesman-Review Newspaper
Spokane, Washington  Est. May 19, 1883

Inflation rising in China

Joe McDonald Associated Press

BEIJING – China’s inflation rose to its highest level in more than 11 years in January after devastating snowstorms worsened food shortages, according to data reported Tuesday, and analysts warned there might be sharper increases to come.

Consumer prices in January climbed 7.1 percent from the same month last year, driven by an 18.2 percent rise in costs, the National Bureau of Statistics reported.

Economists warned that despite efforts to ease food shortages, China faces pressure for prices to rise across the board because of higher wages and costs for coal, iron ore and other industrial materials.

February inflation “is likely to be much higher than 7 percent, and might even get close to double-digit levels,” said Goldman Sachs economists Yu Song and Hong Liang in a report to clients. “Inflation is likely to have further legs to run.”

High inflation could complicate Beijing’s efforts to keep the fast-growing economy from overheating and add to pressure to let the exchange rate of its currency, the yuan, rise faster. China’s economy grew by 11.4 percent in 2007 and is expected to expand by at least 9 percent this year.

Surging food costs are a political concern for Chinese leaders because they hit the poor majority hard in a society where families spend up to half their incomes on food. Bouts of high inflation in the 1980s and ‘90s sparked protests, which the government hopes to avoid repeating.

Economists expect interest rate increases this year but say they should be modest because the key factor driving inflation is shortages of pork and some other food, rather than too much credit. Beijing has nudged up rates over the past two years to cool a lending boom. But it faces the dilemma that more rises at a time when U.S. rates are falling could attract money from abroad, adding fuel to the boom.

Economists say Beijing is more likely to let the yuan rise faster against the dollar. That could make Chinese goods more expensive abroad, reducing the flood of export revenues that are adding pressure for prices to rise. The yuan has risen by 13 percent against the dollar since 2005 but the pace has quickened in recent months.

Analysts have boosted inflation forecasts for China since the January storms, which killed at least 107 people, wrecked crops and destroyed farms across the south. Deutsche Bank says inflation could hit a peak of 8 percent for the first quarter. Lehman Bros. forecast price rises of up to 7.5 percent in February before the surge eases in March.