Surging food prices in China sent the headline inflation rate in the powerhouse Asian economy soaring last month to its highest for more than two years, official figures showed yesterday.

The latest jump in Chinese inflation, to an annual rate of 3.4 per cent in May, up from 3 per cent in April to the highest for 27 months, reinforced economists’ expectations that the country’s central bank would raise interest rates again soon.

Fears of higher interest rates sparked by the inflation data triggered another sharp fall in the volatile Shanghai stock market in morning trading. However, share prices quickly rebounded to close 1.9 per cent higher – and more than 10 per cent up from Monday of last week.

Rising inflation rates in China are boosting the stock market there, as savers who earn just over 3 per cent on their bank deposits divert capital into shares in search of higher yields.

Last month’s inflation jump was driven by further steep increases in the cost of food, exacerbated by a pork shortage in the country. Food prices as a whole rose 8.3 per cent last month from a year earlier, while meat prices were up by a massive 26.5 per cent.

Pork prices have risen as demand for corn for ethanol has fuelled an increase in the cost of grain for pig feed. The problem has been worsened by a recent outbreak of disease among pigs in 22 provinces.

With the latest inflation rise meaning that China’s official interest rates are now negative in real terms, providing little restraint for its booming economy, there was little doubt among analysts that the People’s Bank of China would act again soon.

The central bank has already raised interest rates twice this year, as well as moving five times to tighten reserve requirements on commercial banks, as it seeks to quell inflation, reduce stock market speculation and rein in a runaway investment boom.

However, there was some comfort in yesterday’s data as nonfood inflation remained steady at an annual rate of 1 per cent.

Mark Williams, an economist at Capital Economics, said: “Officials will be reassured not only that consumer price inflation is almost entirely confined to food, but also that liquidity seems to be coming back under control.” He noted that annual growth of China’s broad money supply in May eased to 16.7 per cent, the second lowest since July 2005.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive