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China’s inflation rate hit a 10-year high of 5.6 per cent in July, raising expectations of further tightening measures and increasing concerns about an eventual knock-on impact on the real economy.The spurt in inflation comes at a sensitive time in China’s political calendar, ahead of the five-yearly communist party congress in October, when stability is at a premium.Outbreaks of inflation have triggered political upheaval in the past, most famously in the late 1980s, when rising prices were an important factor in provoking street protests that paralysed Beijing in 1989. The increase in the consumer price index was mainly caused by higher prices for staple meats, such as pork, after an illness killed millions of pigs late last year. Pig prices have also been hit by rising feed costs, and the shortage has been compounded by a fall in the number of pigs being raised, which started earlier last year when prices were relatively low. China consumes about 600m pigs a year.Non-food inflation remains low, at 0.9 per cent, year-on-year, but the government is becoming concerned that the break-out cannot be blamed on food alone.The People’s Bank of China, the central bank, struck a more hawkish tone about inflation in its latest quarterly monetary report. Although the bank does not have a public inflation target, it is generally considered to be aiming to keep the rate below 3 per cent.The stronger-than-expected economy, which grew by 11.9 per cent in the second quarter, a booming stock market and an above-trend growth in money supply, fuelled by record monthly trade surpluses, are all adding to concerns that the economy could be overheating.“There are some reasons to believe that inflation...is also the result of faster growth above capacity and vast liquidity inflows,” said Stephen Green of Standard Chartered bank in Shanghai.Government action to tame inflation by raising the cost of borrowing is complicated by its rigid exchange-rate policy and the need to keep the renminbi stable against the US dollar.The government fears that raising interest rates will encourage further capital inflows into the country, but keeping rates low might also see depositors rush to take money out of the bank to put into higher-yielding assets.As in the days of Noah...
