China's inflation jumps to three-month high

Updated: 09 February 2012 12:15

China's annual inflation rate hit 4.5% in January, the highest level in three months, data showed today.

China's annual inflation rate hit 4.5% in January, the highest level in three months, data showed today, after consumers splashed out on food and gifts over the Lunar New Year holiday.

The country's consumer price index, a key gauge of inflation, was higher than the 4.1% in December and ended five months of easing price pressures in a row - caused by government restrictions on lending and property purchases.

Analysts said the holiday, also known as the Spring Festival, was unusually early this year and had distorted the monthly data. Retail spending typically soars during the week-long festival, the most important celebration in the Chinese calendar, as consumers ramp up spending on food, wine and gifts for family and friends.

Before January, inflation had eased for five months in a row after hitting a more than three-year high of 6.5% in July and analysts said the downward trend would likely resume in February as the economy continued to slow.

The rebound in inflation was driven by food prices, which soared 10.5% year-on-year in January compared with 9.1% in December, the National Bureau of Statistics said.

The producer price index, which measures the cost of goods at the farm and factory gate, rose an anaemic 0.7% in January compared with 1.7% in December, the statement said, indicating consumer price pressures would ease in the coming months.

There is mounting evidence that China's growth is slowing as the ongoing debt crisis in Europe and weakness in the US hurts demand for Chinese exports, a key driver of the world's second-largest economy.

The International Monetary Fund this week warned that an escalation of Europe's fiscal woes could slash China's economic growth by half this year, and it urged Beijing to prepare stimulus measures in response. In the IMF's "downside scenario" China's growth would fall by around four percentage points this year from the 8.2% rate it projected in January.

But Chinese leaders have been very cautious about opening the credit valves for fear of reigniting inflation, which has the historic potential to trigger social unrest in the country of more than 1.3 billion people.

Late last year the central bank eased lending restrictions on banks and analysts expect similar moves this year as authorities try to spur economic activity and prevent a damaging collapse in the property market.

Policymakers are also easing taxes and improving funding channels for small and medium-sized businesses which are huge employers but are often shunned by the major banks.