China's inflation rose to a 37-month high in July, adding to pressure on Chinese leaders to cool living costs while keeping economic growth on track as the U.S. and European outlook worsens.
Consumer prices in the world's second-largest economy rose 6.5 percent over a year earlier, up from June's 6.4 percent, data showed Tuesday. That was driven by a 14.8 percent jump in food costs, up from June's 14.4 percent and leaving the inflation rate well above the government's 4 percent target for the year.
The jump in prices came despite a slowdown in manufacturing and other economic activity in July following repeated interest rate hikes and other curbs imposed to cool an overheated economy.
Beijing has to strike a difficult balance between stopping inflation and easing controls to support Chinese companies as U.S. and European demand weakens, said IHS Global Insight analyst Alistair Thornton.
"They're in a really tough position now," Thornton said. "If they want to start loosening (monetary policy) and buoying up growth, they could face the risk of compounding higher-than-desired inflation."
Analysts blame the inflation spike on the dual pressures of consumer demand that is outstripping food supplies and money surging through the economy from a bank lending boom that helped China ward off the 2008 global crisis.
Rising prices, especially for food, are politically dangerous for the Communist Party because they erode economic gains that underpin its claim to power.
Beijing is trying to rein in economic growth that surged to 9.5 percent in the quarter that ended in June just as the United States, Japan and other governments are struggling to shore up their own lagging economies.
Some observers had expected at least one more Chinese rate hike this year but analysts said that now looked unlikely due to uncertainty following Standard & Poor's downgrade of U.S. sovereign debt.
"This is the kind of data that should trigger (an) interest rate hike, but the turmoil in global financial markets will probably delay the action," said Wei Yao, China economist for Societe General, in a report.
A survey by HSBC Corp. released earlier showed manufacturing contracted in July for the first time this year. HSBC's purchasing managers index fell to a 29-month low of 49.3 on a 100-point scale on which numbers below 50 show activity contracting.
Inflation has climbed steadily despite five interest rate hikes since October 2010 and government curbs on lending and investment. Analysts expected it to peak by midyear and then decline, but prices for pork and vegetables spiked up after summer floods wrecked crops in China's south and east.
The price of pork, China's staple meat, rose 56.7 percent in July over a year earlier, the National Bureau of Statistics reported. Eggs rose 19.7 percent and fresh vegetables were up 7.6 percent.
The overall price rise was the fastest since June 2008's 7.1 percent.
Inflation is likely to stay above 6 percent through the quarter that ends in September, said Societe General's Wei.
Chinese shoppers complain food prices are rising so fast they have been forced to cut back on buying meat, eggs and fresh fruit.
Deng Yuanqin, who sells eggs in a Shanghai market, said her family's rent has risen 50 percent over a year earlier while her income is being squeezed by the soaring wholesale cost of eggs.
"We make even less money than before," said Deng, 35, who lives with her husband and kindergarten-age son. "We spend less money for ourselves, though not for my son."
Premier Wen Jiabao, the country's top economic official, expressed confidence in June that inflation was under control. But he later acknowledged it would overshoot the official 4 percent target for the year.
The World Bank raised its forecast of China's economic growth in April from 8.5 percent to 9.3 percent and said Beijing should tighten monetary policy further to cool prices.
Smaller private companies that produce a big share of China's growth and new jobs have been hit hard by the lending curbs. Widespread reports say many cannot get credit at a time when they also face pressure from higher wages and other costs.
"There is growing concern about China's ability to achieve sustainable growth in the future," said Jing Ulrich, JP Morgan's chairwoman for global markets, China, in a report to clients.
AP researcher Fu Ting in Shanghai contributed.
National Bureau of Statistics (in Chinese): http://www.stats.gov.cn