China Inflation Spikes in October

China’s consumer prices increased at their fastest pace in two years in October, strengthening expectations the central bank might continue to tighten monetary policy to curb inflationary pressures.

Fueled by a spike in food prices, the consumer price index jumped 4.4% in October, well above the 3.6% reading in September and beating economists’ expectations for a 4% rise.

The nation’s producer price index accelerated 5% during the month, also beating estimates for a 4.6% rise and September’s 4.3% increase.

Food prices soared more than 10% during the month, while non-food price increases, although relatively modest at 1.6%, were higher than the 1.4% increase recorded in September.

Lu said the central bank was now expected to raise lending rates three more times before the end of 2011, in addition to increasing banks’ reserve ratio requirements by 1 to 1.5 percentage points, allowing a 5% appreciation in the yuan and stepping up capital controls.

The government was also likely to put off increases in utility and energy prices and to maintain a loose fiscal policy despite the tightening in China’s monetary policy, he said.

China started to unwind its easy monetary-policy stance over the last month to tamp down on inflationary pressures. After raising interest rates by a quarter point and increasing reserve ratio requirements by a half-point on large banks in October, authorities also tightened foreign-exchange controls and again increased reserve requirements on some banks by a half-point this week.

At the same time, Beijing has recently begun to allow the yuan to appreciate at a faster rate against the U.S. dollar to ease inflation. Thursday, it allowed the currency to rise to a fresh record against the U.S. dollar, setting the mid-point of the greenback’s daily trading range at 6.6242 yuan, down from 6.6450 yuan on Wednesday. The dollar is allowed to move by 0.5% in either direction from the mid-point.

The spike in October inflation came even as some other economic indicators softened slightly, with the nation’s industrial output increasing at a 13.1% rate from the same month last year, while retail sales expanded 18.6%. In September, industrial production had risen by 13.3%, while retail sales increased 18.8%.

Urban fixed-asset investments, meanwhile, rose 24.4% in the first 10 months of this year, also edging down from a 24.5% growth in the January-to-September period.

China Inflation Spikes in October, MarketWatch
11/11/2010 4:00:16 AM