Food Boosts China Inflation to 6.5 pct, Decade High

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Soaring food prices propelled China's annual consumer price inflation to 6.5 percent in August, the fastest pace in nearly 11 years, cementing expectations the central bank will defy the global trend and keep raising interest rates.The inflation rate published on Tuesday, up from 5.6 percent in July, easily surpassed economists' forecasts of 5.9 percent and was the highest reading since December 1996."Going forward we believe there are non-trivial price risks that inflation may continue to edge up," economists at Goldman Sachs said in a note to clients.

China also reported a trade surplus for August of $24.97 billion. It was the second biggest on record but slightly lower than forecast as the ending of some tax rebates dented exports.The ruling Communist Party, aware that inflation has touched off unrest in China down the ages, has voiced increasing concern about the speed of price rises.A senior party researcher warned on Monday that inflation becomes difficult to control the price once it exceeds 5 percent, while a local paper said Beijing had told schools and colleges in the capital not to raise canteen food prices as inflation climbs.The National Bureau of Statistics said inflation was driven by an 18.2 percent leap in the cost of food, which accounts for a third of the consumer price basket. Meat prices rose 49.0 percent in August from a year earlier..

China's pig population has fallen 10 percent due to blue-ear disease and reduced incentives to rear hogs, including fast-rising feed grain costs and low prices last year. China, the world's biggest producer and consumer of pork, could quadruple its imports of the meat this year to 100,000 tonnes to ease the shortage, industry sources said on Tuesday. The government has already introduced a raft of incentives to increase the supply of pork. In one downtown Beijing alley on Tuesday, the inducements seemed to be working: a woman was taking an oinking piglet, and her dog, for an early-morning walk.

Most economists accept that a central bank can do little about supply shocks such as a shortage of pigs; non-food prices. But the People's Bank of China has voiced worries that inflation will start rippling through the economy as people start to expect prices to keep rising and demand higher wages. "The risk is that if the economy continues to grow very rapidly, this inflation, which looks concentrated in food, starts spreading and influencing inflationary expectations," said Rob Subaraman.

But if people do respond to higher prices by rearing more pigs, food prices could start to fall sharply at a time when weaker U.S. growth might be sapping Chinese exports.

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