Inflation in China has surged to an 11-year high and is likely to rise further as damage to crops from devastating winter storms is felt, figures released yesterday revealed.

Moreover, soaring food prices are not the only factor fuelling consumer price inflation (CPI). China’s producer price index — measuring prices of goods as they leave the factory — climbed 6.1 per cent in January to its highest rate in three years, because of higher commodity prices and transport problems blamed on snowstorms.

The state-run Xinhua news agency said: “Higher prices at the producer level could lead to rising consumer prices as producers might be pressured to increase prices of consumer products to offset rising costs.” The warning betrayed fears within the Communist Party over potential civil unrest and economic instability in a year, thanks to the fast-approaching Beijing Olympic Games, in which the eyes of the world will be on China.

Chinese consumer price inflation hit 7.1 per cent in last month, cementing expectations that Beijing would stick to a tight monetary policy despite softening economic growth. In addition, rapid money growth and rising raw materials costs have yet to feed into the numbers.

Goldman Sachs, in a note to clients, said: “The acceleration in money and credit growth in January suggests that inflation is likely to have further legs to run.”

Hong Liang and Yu Song, the economists, said that CPI for this month was likely to rise by much more than 7 per cent and could approach double digits. “Therefore, we believe it is far too early to expect any policy loosening in China,” they said. “To the contrary, policy-makers in China will likely try to tighten monetary policy further, with more reserve requirement ratio hikes, faster yuan appreciation and more heavy-handed controls over bank lending.”

Inflation is starting to hurt ordinary people in a country where tens of millions live in poverty and as much of 50 per cent of household income is spent on groceries. Food, which makes up one third of China’s consumer basket, cost 18.2 per cent more in January than a year earlier, after rising 16.7 per cent in the year to December. Many Chinese say that now they try to avoid pork because the price of the staple meat for the country’s 1.3 billion people has soared 58.8 per cent from January last year. Swine disease, surging feed grain costs and low prices in 2006 that deterred farmers from rearing pigs are responsible for the rise, which has spilt over to other meat and food items.

Many economists say that they do not expect a long-term impact from the worst snowstorms in half a century that swept large areas of central and southern China last month and early this month, disrupting transport links and damaging crops. One encouraging sign is that nonfood inflation rose only modestly to 1.5 per cent in January from 1.4 per cent in December, the National Bureau of Statistics reported.

Further rises in interest rates are seen as highly likely after the central bank raised rates six times last year.

Jun Ma, chief China economist at Deutsche Bank in Hong Kong, said: “It’s going to be very tricky in the next few months. Right now, there is pressure for monetary authorities to relax a little bit due to the need for financing reconstruction after the snowstorm and pressure from the export sector . . . But probably in the second half of March or April, when inflation continues to make new highs, the Government will be convinced that further tightening is inevitable.”

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