China’s higher than expected August inflation poses problems for authorities

Beijing, China (4E) – The Chinese government is now facing a dilemma between balancing price growth and easing monetary policy to support the slowing economy as latest government data shows August inflation increased.

The National Bureau of Statistics (NBS) reported on Sunday that China’s consumer price index (CPI) for August was much higher compared to July. Food prices in August increased 3.4 per cent compared to the same period in the previous year, which is higher than the 2.4 per cent posted in July.

For the period covering January to August this year, the CPI increased 2.9 per cent compared to the first eight months of last year, which is within the 4 per cent cap that the government has targeted for 2012, according to the NBS report.

Based on a month-on-month comparison, the CPI gained 0.6 per cent in August from the previous month while the producer price index (PPI) fell 0.5 per cent.

The PPI, which gauges wholesale level inflation, tumbled 3.5 per cent in August compared to the same period last year, falling at a much faster rate than July which declined by 2.9 per cent. The data suggests a pessimistic outlook for the Chinese economy.

The rise in CPI growth was boosted by price hikes in food as global grain prices soared in recent months and the heavy rains in China lowered production of vegetables.

Analysts believe that the latest movement in prices will make it hard for Chinese authorities to control inflation at the same time make money accessible to the system in order to stimulate economic activity.

The People’s Bank of China has already cut interest rates twice since June as a measure to reverse the decline in economic growth which slowed to 7.6 per cent in the second quarter.

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