China’s central bank, the People’s Bank of China has said price levels will remain high throughout the first half of the year as the nation is facing an ‘increasing’ risk of inflation.

The bank said in its monetary policy report for the fourth quarter that structural supply shortfalls and rising international prices would hold domestic price levels at a high level for a period of time.

Growth of the consumer price index (CPI), a barometer of inflation, surged to an 11-year high of 7.1% last month.

Analysts said although raw agriculture prices went up substantially last month, it normally takes one or two months for the pressure to pass through to manufactured and processed food items, which will add pressure to inflation in the following months.

Food price rises may in turn spill over to other sectors, pushing up prices of other products and labor costs.

Ma Jun, chief economist of Deutsche Bank in China said, ‘The underlying inflationary pressure is even stronger than the January headline number is suggesting, and CPI inflation will likely make two more new highs to reach 7.8% in February and 8% in March.’

With a view to cushioning the impact of international commodity price rises, the central bank said it would further use more flexible exchange rate to reduce inflationary pressure.

The renminbi, has appreciated more than 13% since it was de-pegged from the dollar in July 2005. It climbed 6.9% against the US dollar in 2007.

The central bank report said most exporters had adapted better than expected to the stronger renminbi.
Source: China View