Chinese inflation rose at its fastest pace in 11 years last month, giving the Government the headache of how to cool the world’s fastest-growing major economy without killing the world’s best-performing stock market.

Consumer price inflation leapt to 6.5 per cent, driven by an 18.2 per cent jump in the cost of food, which accounts for a third of the consumer price basket. The National Bureau of Statistics said that meat prices alone rose 49 per cent, driven mainly by a surge in the cost of pork, China’s staple meat.

That rise, the fastest since December 1996, has prompted assessments from economists that the People’s Bank of China, the central bank, could raise interest rates twice more this year. The bank has increased rates four times this year already to try to keep a lid on inflation and prevent the world’s fourth-largest economy from overheating. The economy grew at 11.9 per cent in the latest quarter.

Rob Subbaraman, chief Asia economist at Lehman Brothers in Hong Kong, said: “The risk is that, if the economy continues to grow very rapidly, this inflation, which looks concentrated in food, could spread.”

China’s ruling Communist Party is concerned that any rise in inflation could lead to outbreaks of civil unrest. A senior party researcher said this week that inflation becomes difficult to control when it exceeds 5 per cent. Beijing authorities have told schools and colleges in the capital not to raise canteen food prices as inflation climbs, while incentives to rear pigs seem to be paying off.

The Shanghai stock market, which has more than doubled since the start of the year, reacted accordingly. Stocks dropped 4.5 per cent yesterday, the biggest daily fall in two months, because of fears of a tightening in the ample supplies of new money that have fuelled the year’s bull run. The market tumbled in the last half-hour of trade to end at 5,113.96 points, still up 91 per cent on the year. While the benchmark index might at last be starting a substantial pullback, analysts said that a fully fledged bear market seemed unlikely.

Liu Lifeng, fund manager at BOCI Securities, said: “All the Government’s policies will have a cumulative effect on the market. Eventually, there will be a last straw on the camel’s back.”

The central bank has already voiced worries that inflation will start to ripple throught the economy as people start to expect prices to keep rising and demand higher wages. The short-term outlook could depend on the autumn harvest, which is expected to be poor.

Goldman Sachs said: “Going forward we believe there are nontrivial risks that inflation may continue to edge up. We expect the central bank to respond to higher inflationary pressures with decisive tightening measures, including two interest-rate hikes by the end of this year.”

Yesterday China reported a trade surplus for August of $24.97 billion (£12.29 billion), the second-biggest on record but slightly lower than forecast as the ending of some tax rebates dented exports. Mr Subbaraman said: “That could unmask severe oversupply in China’s industrial sector, which could lead to a flip from concern about inflation to worries about deflation. So you don’t want to overtighten.”

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