“China’s inflation rate hit a 10-year high of 5.6 per cent in July, raising expectations of further tightening measures and increasing concerns about an eventual knock-on impact on the real economy…
The increase in the consumer price index was mainly caused by higher prices for staple meats, such as pork, after an illness killed millions of pigs late last year. Pig prices have also been hit by rising feed costs, and the shortage has been compounded by a fall in the number of pigs being raised, which started earlier last year when prices were relatively low. China consumes about 600m pigs a year.
Non-food inflation remains low, at 0.9 per cent, year-on-year, but the government is becoming concerned that the break-out cannot be blamed on food alone…
The government fears that raising interest rates will encourage further capital inflows into the country, but keeping rates low might also see depositors rush to take money out of the bank to put into higher-yielding assets.”
A stronger cocktail of cooling measures may be needed. It will be interesting to see how this balancing act will work out, and just how joined-up policies will be across government.
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Chinese inflation hits 10-year high 
By Richard McGregor in Beijing
Published: August 13 2007 05:46 | Last updated: August 13 2007 18:51