Inflation in China hits 34-month high

By Jamil Anderlini in Beijing

Consumer inflation in China rose to its highest level in nearly three years in May, up 5.5 per cent from a year earlier, according to government figures released on Tuesday.

The benchmark consumer price index accelerated from the 5.3 per cent year-on-year rise recorded in April, despite government efforts to rein in liquidity and slow price rises.

Persistent inflationary pressure means Beijing is unlikely to let up on its current round of monetary tightening even though the overall economy appears to be cooling.

Since October, China’s central bank has raised benchmark interest rates on four occasions and increased the proportion of deposits that banks must hold in reserve eight times. It has also used less orthodox tools, including loan quota restrictions for banks to slow their lending.



These policies have started to take effect, with total new bank loans in China in May reaching Rmb551.6bn ($85.1bn), well below April’s Rmb740bn or Rmb639bn for the same month a year earlier.

In other signs that the economy is gently slowing, industrial output moderated to a 13.3 per cent year-on-year increase in May, down from 13.4 per cent in April. Meanwhile, retail sales rose 16.9 per cent from a year earlier, down from 17.1 per cent in April.

These figures will reassure Beijing that tightening measures have not been too harsh and that efforts to cool the economy and bring down inflation are not likely to cause a “hard landing”.

Most economists expect price rises to peak over the next two months, as the tightening measures start to work, and to moderate until the end of the year.

But for now, Beijing will remain vigilant about the possibility of further inflation spikes that could exacerbate general discontent and spill over into popular protests against Communist Party rule.

Food price increases are particularly sensitive because of the disproportionate impact they have on low-income parts of society. In May, food inflation hit 11.7 per cent, up from 11.5 per cent in April.

China’s producer price index rose 6.8 per cent from a year earlier in May, unchanged from April’s 6.8 per cent rise and higher than most economists had predicted.