China’s inflation hits 27-month high as food prices skyrocket

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Beijing, Jun 12 : Surging food prices boosted China’s annual consumer price inflation in May to a 27-month high, extending a rising trend and reinforcing expectations that interest rates will go up further.

Inflation quickened to 3.4% from 3% in April, the National Bureau of Statistics said on Tuesday, as food prices, which make up a third of the consumer basket, rose 8.3% from a year earlier and a shortage of pork caused meat prices to jump 26.5%.

The overall inflation figure was in line with the median forecast in a Reuters poll of economists, but Shanghai’s benchmark stock market index fell as much as 2.1% at one point on expectations of tighter monetary policy.

Continuing the market’s roller-coaster ride of late, prices then recovered and the index closed 1.9% higher.

In an illustration of the effects of rising inflation, bank deposits held by households dropped by 278.4 billion yuan ($36.4 billion) in May, the largest fall in at least five years, as millions of Chinese shifted their savings into the booming stock market in search of higher returns. The withdrawals reduced banks’ total deposit base of 36 trillion yuan by 0.78 %.

“We expect tighter monetary policy in the coming months, given heightened inflation risks and negative real interest rates,” economists at Goldman Sachs said in a note to clients.

Non-food inflation remained subdued, with prices up just 1% from a year earlier, but economists said the data reinforced the case for further central bank tightening.

Yi Xianrong, an economist with the Chinese Academy of Social Sciences (CASS), the government’s premier think tank, agreed that a third interest rate increase this year was inevitable as real deposit rates were being pushed into negative territory. Savers earn 3.06% on 12-month certificates of deposit, meaning that after a 20% tax is deducted the value of their money is failing to keep pace with inflation.

“The real rate in China is negative by about 1 %age point, so I think the current benchmark needs to go up by at least that much,” Yi said.

On May 18 China’s central bank raised deposit rates by more than its lending rate to encourage people to keep money in the bank and not pour it into the red-hot stock market. The drawback is that that policy narrows the still fragile banking sector’s lending margins.