Chinese Inflation Still Rising, Topping Expectations

More monetary tightening may follow as economy still heats up

China’s inflation rate for February rose above analysts’ expectations in data released on Friday, coming in at 4.9% for the month and clearing the way for further monetary tightening by Beijing.

However, Friday’s data also showed that current policies to control inflation were working, Reuters reported. Although analysts had expected the February rate to drop to 4.7%, the actual 4.9% came in well under earlier forecasts last year that inflation would continue at a breakneck pace. With the volatility of food prices stripped out, inflation actually slowed.

Zhou Xiaochuan, governor of the People’s Bank of China (PBC), showed cautious optimism about the consumer price index when he said at a news conference, "If we observe the CPI figures for December, January and February, although they are high, inflationary expectations are currently relatively stable."

Chinese interest rates seem destined to rise further, however, and that prospect, along with indications that the PBC will further raise reserve requirements, put a damper on global markets, already bowed under the combined effects of social unrest in the Middle East/North Africa region, the Japanese earthquake and subsequent tsunami and concerns over weak U.S. economic data.

"Clearly, the consumer price index is stabilizing, but the risk is still significantly on the upside. It means the central bank will probably stay on the course of tightening,” saidWei Yao, economist with Societe Generale in Hong Kong, in the report.

Liu Dongliang, analyst with China Merchants Bank in Shenzhen, concurred, saying, "The higher-than-expected CPI may push the government to raise interest rates or the reserve requirement ratio in March."

One thing China is not considering is allowing its currency to appreciate at a faster rate. Zhou dismissed the idea. However, Chinese economic data at the beginning of its lunar new year is difficult to work with, since it may not indicate the true state of the economy. At the beginning of the year, many Chinese businesses either close or do not run at peak capacity, and this year’s lunar new year fell early in February.

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