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Bad news overnight on Chinese inflation: Is it out of control?
03/11/2010 8:30 am EST
Higher than expected consumer price inflation in February at an annual rate of 2.7% is likely to revive fears that Beijing will try to slow the speed of economic growth. Economists had expected an increase in inflation of 2.5%, according to a Bloomberg survey. Inflation had dropped in January to an annual 1.5% rate from 1.7% in December.
Chinese stocks fell on the inflation news. The Shanghai Composite Index was down 0.7% as of noon Shanghai time. The index is down 7.6% in 2010.
The jump in the inflation rate to 2.7% is bad news for Chinese officials who have said they aim to hold inflation to 3% or less in 2010. On the current trend inflation will be running above that target by April.
Inflation momentum is also building at the producer price or wholesale level where wholesale prices climbed at an annual 5.4% in February from a 4.3% annual rate in January. Higher prices at the wholesale level almost always lead to higher inflation in consumer prices.
So far government steps to slow bank lending and the growth rate of the money supply have had less effect than projected.
Bank lending in February did drop to $103 billion in new loans from $204 billion in January but the February total was still 14% above economist expectations. M2, the most widely followed measure of the money supply, rose by 25.5% in February. That was only a slight dip from January’s 26% growth rate and well above the government’s target of 17% growth in M2 for 2010.
China’s central bank, the People’s Bank of China, has already raised reserve requirements for banks twice in 2010 in an effort to slow lending and the economy. Looks like more drastic measures—perhaps China’s first increase in benchmark interest rates since December 2007—are in store for the Chinese economy.
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