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China Inflation Surging to Fastest in 3 Years Weakens Case for Rate Pause

China’s inflation rose to a three- year high of 6.4 percent in June, a level that some analysts said may represent the peak for 2011 as price gains moderate in the second half.

The pace exceeded the 6.2 percent median estimate in a Bloomberg News survey of 19 economists. Producer prices were unchanged from the previous month, a report on the statistics bureau website showed today.

Premier Wen Jiabao aims to tame inflation without choking off an expansion that is already slowing as export orders weaken and monetary tightening takes effect. An unexpected increase in U.S. unemployment and a threatened default by Greece have underscored the world’s reliance on China, the fastest-growing major economy.

“The need to control domestic inflation has complicated the Chinese government’s attempts to engineer a soft landing for the economy,” said Jing Ulrich, Hong Kong-based chairman of global markets for China at JPMorgan Chase & Co. June “will likely mark the peak in the latest inflation upturn.”

Producer prices gained 7.1 percent from a year earlier, the statistics bureau report showed. That compared with the median estimate of 6.9 percent in a Bloomberg survey.

Today’s data came three days after the central bank announced the nation’s fifth interest-rate increase since mid- October. The Shanghai Composite Index has fallen 0.4 percent this year on concern that efforts to cool inflation will damp profits and growth in the world’s second-biggest economy.

Pork Costs Soar

Inflation was mainly driven by a 14 percent gain in food costs, the biggest increase in three years, and also pushed up by an unfavorable base for comparison a year earlier, an effect that will diminish in the second half. Pork, a Chinese staple, rose 57 percent. Non-food prices climbed 3 percent, the biggest gain since at least 2005.

The government may keep interest rates on hold for the rest of the year, while boosting bank reserve requirements already at record levels and selling bills to drain cash from the financial system, Ulrich said.

Consumer prices rose 0.3 percent from May, the most in four months, after central bank Governor Zhou Xiaochuan said yesterday that policy makers are more focused on month-on-month numbers than yearly figures.

Shanghai taxi fares jumped today, adding to price increases by companies from McDonald’s Corp. (MCD) to Starbucks Corp. While Wen said last month that inflation is “controllable,” he also acknowledged that the government’s 4 percent target for the full year may be out of reach.

Outlook for Rates

Bank of America Merrill Lynch said today that the chance of the central bank adding to this week’s quarter-point rate increase this year is “very small” with inflation likely to have peaked. Societe Generale SA sees benchmark borrowing costs staying on hold as reserve requirements rise.

UBS AG said that the central bank may raise rates if inflation is as high next month, while Australia & New Zealand Banking Group Ltd. predicted an increase this quarter as the pace of inflation continues to outstrip returns on bank deposits.

Signs that the economy is cooling include a slide in a manufacturing gauge to a 28-month low in June. Investors are focused on China’s growth after U.S. job growth plummeted since April and as officials in Europe try to avert a debt default by Greece.

China’s Expansion

China’s expansion may have slowed to 9.3 percent in the second quarter from a year earlier after a 9.7 percent increase in the first three months of this year, according to the median estimate in a Bloomberg News survey. That data is due July 13.

Goldman Sachs estimates gross domestic product rose 8 percent from the previous quarter on a seasonally adjusted and annualized basis, compared with its 9 percent estimate for the previous three months.

Inflation and corruption can have an “impact on the stability of a political power and the peacefulness of a society,” Wen said in London last month. He pledged in March to rein in “exorbitant” house price increases in some cities that have fueled public discontent.

Global food costs are also part of the challenge, with prices rising 39 percent in June from a year earlier, according to the Food and Agriculture Organization of the United Nations.

“I don’t think policies should loosen,” Cui Li, a Hong Kong-based economist at Royal Bank of Scotland Plc. who previously worked at the International Monetary Fund, said before today’s data. “We may have to wait until August for inflation to peak.”

China’s key one-year lending rate is 6.56 percent and the one-year deposit rate is 3.5 percent.

--Sophie Leung, with assistance from Ailing Tan in Singapore. Editors: Paul Panckhurst, Ken McCallum.

To contact the reporter on this story: Sophie Leung in Hong Kong at sleung59@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst in Hong Kong at ppanckhurst@bloomberg.net

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