China’s inflation rebounded in May to its highest level in nearly three years, pushed up by stubbornly high food prices, even as interest rate hikes and other controls are cooling the overheated economy.
The National Statistics bureau said on Tuesday that consumer prices rose 5.5 percent over a year earlier, driven by an 11.7 percent jump in food costs. That was up from April’s 5.3 percent rate and exceeded March’s 32—month high of 5.4 percent.
The figure was in line with economists’ forecasts, but well above the government’s four percent target for the year.
The government reported on Monday that bank lending slowed in May, indicating that repeated interest rate hikes and increases to reserve requirements may finally be reining in the excess lending that has helped drive prices higher.
But drought and other weather disasters have decimated crops in wide parts of the country, as rising consumer demand pushes prices higher. Strong demand in construction and other industries has added to those pressures, spurred by a bank lending spree meant to fight off the impact of the 2008 global crisis.
In Shanghai, the country’s commercial hub, residents are feeling the pinch of surging rent and food prices.
“Everything is becoming more and more expensive. My landlord hit me with a rent increase yesterday, after raising it almost every year. Vegetables and meat are also expensive,” said Zhang Shihua, an online clothing shop owner from neighbouring Anhui province who has lived in the city for eight years.
“We’re now considering moving back to Anhui,” she said.
Mindful of inflation’s role in eroding the economic gains that underpin their claim to power, China’s communist leaders have made taming prices a major priority.
Surging prices for food and other basic necessities have added to frustrations over inequality, abuse of power and suppression of legitimate grievances that have provoked recent protests.
While seeking to impose social “harmony”, the leadership has sought to steer economic growth from the sizzling 9.7 percent rate in the first quarter to a more sustainable level.
Beijing has hiked interest rates four times since October and ordered companies to hold down prices. So far, inflationary pressures have offset those efforts, but economists say the pace of increases has slowed and they expect prices to moderate in coming months.
May’s price increase was the fastest since July 2008, when inflation clocked in at 6.3 percent. It peaked at 8.7 percent in February 2008 but fell back under the shock to export demand from the global crisis.
Food prices are heavily weighted in China’s calculation of its consumer price index and as supplies rebound during the summer months, that pressure should ease, economists say.
“Barring any further shocks to food supply, headline inflation should drop to beneath 3.5 percent by the end of 2011,” Mark Williams, senior China economist at Capital Economics, said in a report on Monday.
So far Beijing’s efforts to cool its spending binge have had mixed results.
Lending curbs have constrained funds available to the small and medium—sized companies that are the main drivers of job creation and growth. Authorities recently announced initiatives aimed at encouraging more lending to that relatively dynamic part of the economy.
Investments have remained relatively strong in real estate and in state—dominated heavy industries, where excess capacity remains a big problem.
China’s industrial output rose 13.3 percent in May, the statistics bureau reported, while investments in construction, factory equipment and other “fixed assets” rose 25.8 percent in January—May over a year earlier and investment in property jumped a whopping 34.6 percent.
