Inflation is higher and People's Bank of China wastes no time in raising bank reserves--interest rate increase not far behind

06/14/2011 4:05 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

What took them so long?

Hours after the release of data showed China’s annual inflation rate moving up to 5.5% in May, Beijing ordered another 0.5-percentage-point increase in bank reserve requirements. China’s biggest banks will need to keep a record 21.5% in reserves against loans. The increase in the reserve requirement will drain about $57 billion from the banking system.

The increase in the May inflation rate to 5.5%, after a drop to 5.3% in April from 5.4% in March was spot on with the consensus call from economists surveyed by Bloomberg.

The big driver was an 11.7% increase in food prices from May 2010 led by soaring costs of pork, fruits, and vegetables. A cabbage that cost 1.83 yuan two months ago, for example, now sells for 2.48 yuan.

But the inflation rate was up pretty much wherever you looked. Non-food inflation accelerated to a 2.9% annual rate, the fastest speed in six years. Producer prices, an indicator of future inflation, rose at a 6.8% annual rate in May. That was above economist expectations.

China’s economy did slow, indicating that the government’s efforts to fight inflation might be working, but the slowdown was less than expected. Industrial output grew at a 13.3% annual rate in May. That was marginally lower than April’s 13.4% growth rate. But economists had been expecting output growth to drop to 13.1% in May. (If you’re looking for a reason that European and U.S. stocks are up today on this morning’s China news, this is it: China is growing faster than expected.) Investments in fixed assets grew by 25.8% in the first five months of 2011.

The People’s Bank of China has raised interest rates four times since September 2010 and this data virtually guarantees at least one and quite possibly two more interest rate increases this year with the next increase coming as early as next month.

 

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