China's inflation battle intensifies

china_inflation.gi.top.jpgConsumer prices, led by higher food prices, increased 3.5% last month. By Chris Isidore, senior writer


NEW YORK (CNNMoney.com) -- Inflation in China accelerated last month, as rising food prices pushed overall prices higher.

The consumer price index increased to 3.5% in August, compared to a 3.3% annual rate in July, China's National Bureau of Statistics reported on Saturday.

The global economy has become increasingly dependent on China's rapid expansion as an engine for growth.

But prices in the fast-growing Chinese economy have been outpacing most western economies; U.S. prices were up only 1.2% over the 12 months ending in July.

That has raised some concerns that the Chinese government might take steps to slow down growth in order to keep prices in check.

"China has to be careful," said Robert Brusca of FAO Economics. "Their big objective is domestic stability, and domestic stability requires employment. But they can't let inflation get away from them. So they have a tiger by the tail."

Separately, China reported that the country's industrial output increased 13.9%.

The increases in Chinese consumer prices have been driven by higher food prices, up 7.5% in the last 12 months. Food makes up about a third of the overall consumer price index in China, compared to only 14% of the official mix of prices in the United States. Fresh vegetables have shot up 7.7% in the last month and further price increases are expected due to a poor wheat harvest in Russia.

There is little the Chinese policymakers can do to control food prices other than provide subsidies, said Virendra Singh, director in international economics for Moody's Economy.com.

But he said there is concern that rising food prices could spill over to the rest of the economy as workers demand higher wages.

So his firm is expecting the People's Bank of China to move soon to raise interest rates.

In fact, the August price report got particular attention when China moved up the release of the data by two days, prompting some to speculate the move was done to give financial markets a chance to digest the news and possibly pave the way for the People's Bank of Chinato raise interest rates.

But Jay Bryson, international economist for Wells Fargo Securities, isn't convinced China is getting ready to raise rates because of uncertainty about the strength of the global economic recovery. And he said even if it does raise rates, the impact will be more symbolic than substantial.

"The Chinese have always had a bias toward growth rather than keeping inflation in check," he said. "[A rate hike] could send a signal that these guys are getting serious about inflation."

The Chinese central bank has left rates unchanged since September 2008 when it cut rates in the face of the global financial meltdown.

There isn't an overnight lending rate in China comparable to the U.S. Federal Reserve's benchmark fed funds rate, which has been near 0% since December 2008.

By comparison, the People Bank of China's one-year lending rate has been at 5.31%, but that relatively lofty rate has done little to slow the economy overall.

China's gross domestic product, the broadest measure of the economy, was up 10.3% in the second quarter compared to a year earlier. To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Index Last Change % Change
Dow 16,431.56 6.71 0.04%
Nasdaq 4,105.21 18.98 0.46%
S&P 500 1,867.48 5.17 0.28%
Treasuries 2.72 0.08 3.19%
Data as of 2:34pm ET
Company Price Change % Change
Bank of America Corp... 16.18 0.05 0.31%
Facebook Inc 59.27 -0.45 -0.75%
General Electric Co 26.69 0.57 2.18%
Micron Technology In... 24.01 1.53 6.81%
Cisco Systems Inc 23.18 0.15 0.65%
Data as of 2:19pm ET
Sponsors

Sections

New service lets anyone transfer money up to $900 from one Walmart to another in the U.S. for a fee of $9.50. More

Obama's proposed budget would raise $1.4 trillion more revenue and increase noninterest spending by $446 billion more than current policies, the CBO said in a new analysis. More

Schwinn, Trek and Cannondale are all iconic American bicycle brands. But none of them are made in the United States. More

As Detroit moves closer to reaching a bankruptcy deal, retired civilian workers are poised to be left worse off than firemen and police officers. More

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.