China's inflation jumps to 6-month high

AP News
Posted: Jan 10, 2013 10:45 PM

BEIJING (AP) — China's inflation spiked to a six-month high in December after a freezing winter pushed up vegetable prices, possibly complicating efforts to sustain a shaky economic recovery.

Consumer prices rose 2.5 percent over a year earlier, up from November's 2 percent and the fastest rise since June, the National Bureau of Statistics reported.

That was driven by a 14.8 percent jump in vegetable prices after the coldest winter in seven years led to smaller harvests. The statistics bureau said vegetable prices in some areas rose as much as 40.8 percent.

Higher inflation could hamper the government's ability to support China's recovery with interest rate cuts or other moves for fear of igniting a politically dangerous price spiral. Consumer prices are especially sensitive in a society where the poorest families spend up to half their monthly incomes on food.

"Rebounding price pressures mean tighter monetary policy ahead," said Credit Agricole CIB economist Dariusz Kowalczyk in a report.

The World Bank and private sector analysts expect about 7.5 percent growth this year after 2012's estimated 8 percent expansion. But analysts warn China still could face a danger of a "hard landing" with much lower growth if trade slumps or the country suffers a financial shock from a decline in housing prices or weak investment.

Bank lending rose 15 percent in the second half of last year to 8.2 trillion yuan ($1.3 trillion) but total credit grew by about 20 percent to 16 trillion yuan ($2.5 trillion), the government reported this week. Analysts expect bank lending to rise to about 9 trillion yuan ($1.4 trillion) this year.

China's trade growth rebounded strongly in December in a positive sign for a recovery but analysts warn it will be hard to sustain that momentum due to weak demand in key U.S. and European markets.

That means China has to rely on domestic consumption that is growing but more slowly than authorities want and a flood of government-led investment.

The World Bank and private sector forecasters expect growth of about 8 percent in 2012 and about 7.5 percent this year. That would be stronger than the West and Japan but China's weakest performance since the 1990s.

The communist government spent 2010-11 tightening economic controls to crush inflation that was fueled by a flood of stimulus spending and bank lending following the 2008 crisis. Authorities eased some controls in late 2011 after exporters were battered by a plunge in global demand but have avoided a repeat of their huge stimulus.