Chinese inflation: Why it matters here

NEW YORK (CNNMoney.com) -- Inflation is picking up in China, sparking U.S. concerns that reining in growth there could have negative consequences here.

Some fear that a pullback in China's overheated economy could hurt markets here, by cutting Chinese investment in U.S. stocks and Treasurys. And the higher inflation reading, coupled with 12% annual economic growth rate in the first quarter, is setting off alarm bells around the world.

"Generally with runaway growth comes runaway inflation, so China has got to slow itself down," said Kevin Giddis managing director of fixed income at Morgan Keegan. "I don't think they can continue to grow at this pace without affecting us in one form or another."

China's National Bureau of Statistics reported Tuesday that overall prices were up 2.8% from a year ago, and that food prices rose 5.9%. The producer price index, a measure of wholesale prices, rose even more, up 6.8%.

In April, all the inflation rates there picked up from March. A year ago, overall prices and food prices were both falling in China.

While the inflation numbers were roughly in line with forecasts, concerns about what happens if the Chinese hit the brakes on growth too hard helped spark a sell-off in major stock indexes across Asia on Tuesday.

The People's Bank of China has already taken a number of steps to curb growth, including raising reserves that banks are required to hold. Next up could be raising interest rates, which have remained unchanged since late 2008, and even letting its currency, the yuan, rise in value.

The yuan is essentially pegged to the dollar and letting it rise would mean that the Chinese central bank would not need to buy as many U.S. Treasurys and dollars to maintain that peg, leading to a rising yield.

But Giddis said uncertainty over the European debt crisis, which sent investors fleeing for the safety of U.S. debt, could soften the impact of a Chinese flight from Treasurys.

"If those concerns are with us for the year, they would offset a loss of demand for Treasurys from China," Giddis said. But if the crisis in Europe is settled at the same time that China pulls back on its purchases of U.S. Treasurys, it could cause yields on those bonds to rise by 1 to 1.5 percentage points.

Other experts say that China is likely to hold off on making any drastic moves to curb inflation until it sees how the crisis in Europe plays out.

"Given everything that is happening in Europe, they would want to see that stuff settle down," said Jay Bryson, international economist with Wells Fargo Securities.