China faces higher inflation pressure as food price surge

A resident buys vegetables at wholesale market. (File photo, Xinhua )

Increasing food prices are driving China's inflation higher, a trend seen to limit authorities' space to soften their monetary stance in the coming year.

The consumer price index (CPI), a main gauge of inflation, will continue to speed up in December and during the year after its growth was at its slowest in 33 months in October 2012, analysts said.

The CPI will rise around 2.4 percent year on year in December while food prices will climb 2.5 percent from November, said Lian Ping, chief economist of the Bank of Communications.

The country's inflation rate dropped to 1.7 percent in October due to the cooling economy after reaching a 37-month high of 6.5 percent in July 2011.

It went up to a year-on-year growth rate of 2 percent in November due to higher food prices. The December data will be released Friday.

Snow in north China and low temperatures in the south affected vegetable growth and transportation, pushing prices up for nine weeks in a row since November, Lian explained.

More consumption of meat during the cold weather also led to higher prices of pork, a staple food in the country, he said.

In the week ending Dec. 30, the average wholesale price of 18 types of vegetables gained 2.9 percent week on week in 36 major Chinese cities andpork went up 0.9 percent, Ministry of Commerce data showed.

Vegetable prices are expected to soar 8.36 percent month on month in December, bringing the year-on-year CPI growth of that month to 2.3 percent, according to a research report by Sinolink Futures.

Pan Xiangdong, chief economist of China Galaxy Securities, forecasts farm produce prices to continue going up before the Chinese Lunar New Year, which often sees food consumption surge and falls on Feb. 10 this year.

Food prices account for almost one-third of the weighting in the country's CPI calculation.

Lian believed China's inflation has bottomed out and will enter a new round of upward movement.

The CPI is likely to end 2012 with an annual increase of 2.7 percent, much slower than in 2011. However, it will probably grow 3 percent-3.5 percent this year, he said.

If realized on the higher end of Lian's estimate, the 2013 inflation rate will surpass the current deposit interest rate level. In that case, authorities will be less driven to further reduce interest rates to support growth as that will lead to depositors' losses.

Chinese lenders are now allowed to set a maximum interest rate of 3.3 percent for one-year deposits after the central bank trimmed benchmark interest rates twice in the first seven months of 2012.

Inflationary pressure will heighten in China in the mid- and long-term due to increasing labor costs and accelerated reforms to make prices of resources like water, minerals and energy more reflective of market demand, said Fan Jianping, an expert at the State Information Center, a government think tank.

Quantitative easing measures by central banks in Europe, the United States and Japan may also cause excessive liquidity and give force to inflation in China, according to results of a survey of economists from 11 financial institutions released by the Shanghai Securities News on Wednesday.