China will go on tightening monetary policy, despite a small rise in the inflation rate in the year to January to an annual rate of 4.9%.
That was up from the 4.6% rate in the year to December and under the 5.1% (a 28 month peak) in the 12 months to November.
Some forecasts had put the CPI at around 5.3% to 5.4%, which would have been new 28 month highs.
That was because of the rebound in fresh food prices in January ahead of the Spring Festival and the Lunar New Year, and then the emerging impact of the worst drought for 60 years in parts of the wheat growing area of the country’s north and northwest.
The best sign of the increasing inflationary pressures was in the producer price index (PPI) which rose by an annual 6.6% in the year to January, accelerating from an increase of 5.9% in the 12 months to December, and above the 6.1% annual rate in the year to November.
That, more than the increase in the CPI, tells us that China is facing an inflation problem that is becoming more deeply rooted in everyday non-food costs.
Higher wages are playing a part, as are the rising cost of more imported commodities such as copper, iron ore, coal and oil. They can fall, but it would take another big crunch to do that quickly (as happened in late 2008 and early 2009).
And that’s why rates will continue to rise.
In fact China’s continuing strong growth is helping push commodity prices higher and will continue to do so for a while yet.
The government announced the news and revealed that food prices rose sharply in the month.
"Although the figure is lower than market expectations of above 5 percent, inflation remains a daunting problem complicated by ongoing winter drought in the country’s north, migrant worker wage increases and global commodity price hikes," the official news story read.
"The extremely cold weather and the Spring Festival holiday spending pushed prices up 1 percent from a month ago," NBS said in a question and answer statement on its website.
"Food prices, which in the past accounted for a third of the basket of goods in China’s CPI calculation, surged 10.3 percent year on year.
"The price of grain rose 15.1 percent year on year, and that of eggs was up 20.2 percent. Fresh vegetables advanced 2 percent, while fruit was up 34.8 percent."
But the government also revealed changes to the CPI weightings and denied they had trimmed the rate of increase in the index.
"The NBS also announced Tuesday it had reduced the weighting of food prices on the CPI by 2.21 percentage points and had increased that of living costs by 4.22 percentage points after the nation’s home prices skyrocketed," Xinhua reported.
"The statistics agency said the adjustment added 0.024 percentage points to January’s figure, denying media reports of a drag-down of 0.3 percentage points.
"The NBS said it regularly adjusts the composition of the CPI basket."
The statistics agency has been due to make a five year change to the CPI in early 2011.
But the outcome, especially for the PPI helps explain why rates were raised last week in a surprise third move since October.
But that won’t be the last.
