China's inflation jumped to a 32-month high in March despite government efforts to cool an overheated economy, adding to pressure for more interest rate hikes and other controls.
Prices rose 5.4 percent over a year ago in the world's second-largest economy, driven by 11.7 percent surge in politically sensitive food costs, data showed Friday. That was up from February's 4.9 percent and a setback for communist leaders who have declared taming inflation their priority and raised interest rates four times since October.
"They will have to step up their fight against inflation," said Credit Agricole CIB senior economist Dariusz Kowalczyk.
Analysts say prices are being driven by the dual pressures of consumer demand that is outstripping food supplies and a bank lending boom that was allowed to run too long after it helped China ward off the 2008 global crisis. Regulators are clamping down on credit but analysts say it will be months before the effect is seen.
Inflation is a political threat to the Communist Party because it erodes the public's gains from economic growth, possibly triggering unrest. Food prices are especially volatile in a society where poor families spend up to half their incomes on food.
Beijing's failure to cool prices and growth have frustrated communist leaders who also face mounting foreign pressure to allow China's yuan to rise in value and narrow its swollen trade surplus. Reflecting rising official urgency, Premier Wen Jiabao called in a speech Thursday for authorities to step up the anti-inflation fight.
The economy grew 9.7 percent in the first three months of the year — little changed from the previous quarter's 9.8 percent — despite government efforts to steer growth to a sustainable level following last year's double-digit expansion.
"The government cannot seem to slow the economy down," said IHS Global Insight analyst Alistair Thornton in a report.
China's surging growth and possibly more drastic government efforts to rein it in could have global repercussions.
Washington and other governments complain exports are supported by exchange rate controls that they say keep China's yuan undervalued. They say that swells its trade surplus and hurts foreign competitors at a time when other countries are trying to create jobs.
Chinese leaders have pledged to restructure the economy by promoting consumer spending to reduce reliance on exports and investment. They have promised a stronger yuan, which would both ease trade strains and boost Chinese consumer spending power.
But they have taken few practical steps. Officials including Premier Wen Jiabao have affirmed support for exporters by rejecting a rapid rise in the yuan — a move that would boost consumer spending power — on the grounds that might cost jobs.
China foreign reserves soared past $3 trillion in March as Beijing bought dollars and other currency to restrain the yuan's rise despite a June pledge to allow more exchange rate flexibility.
The International Monetary Fund cited China's currency controls this week as a possible factor that might hamper a global recovery.
Analysts expect at least one more rate hike in the coming months and for Beijing to allow a faster rise in the yuan, which has gained about 4.5 percent against the dollar since a June pledge of more exchange rate flexibility. A stronger yuan could help to cool inflation by making oil and other imports cheaper in Chinese currency terms. Still, many analysts expect inflation to rise further through at least midyear before easing.
"We clearly feel that prices are constantly rising. Every few months there is a new price for things," said Zhang Haichao, a 23-year-old messenger in Beijing.
More drastic measures to cool growth and prices could have repercussions abroad if they cut Chinese demand for iron ore from Australia and Brazil, factory machinery from the United States and Europe and other foreign goods.
March inflation was the highest since July 2008, when prices rose 7.1 percent.
In his speech Thursday, Wen cited surging housing costs and rising public expectations of higher inflation, the official Xinhua News Agency reported. Such expectations can lead to higher wage demands and retail price increases.
"We need to skillfully handle the relationship between promoting economic growth and curbing inflation," Wen said at a Cabinet meeting, according to Xinhua.
Also in the first quarter, retail sales rose 16.3 percent over a year ago.
Spending on factories, real estate and other fixed assets rose 25 percent in March over a year ago despite investment curbs.
The jump in food costs came at a time when prices usually fall as spring harvests start to come in, indicating inflation pressures are strong.
"We are seeing continued very strong growth momentum," Kowalczyk said. "The government has not succeeded in containing inflation, despite increases in interest rates. So they will have to do more."
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