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That inflation in China has hit 4.9 per cent – and that food alone is up more than 10 per cent – is no surprise to the co-owners of the Floating Fragrant Pagoda food stall.

From cramped one-room quarters, co-owners and cooks Cui Jicheng and Zhang Huawei dish out rice and vegetables, noodles and dumplings to hungry customers sitting at plastic tables along the adjacent sidewalk, or into plastic bags for takeaway. Their most expensive dish is 12 yuan, or $1.82 (U.S.); the cheapest is six.

But as they prepared to open after a lengthy Chinese New Year break, the couple reluctantly discussed raising the prices on their modest menu – no wonder, since the eggs neatly stacked in a simple metal bowl are now 20 per cent more expensive than at the same time a year ago.

Fruit is up 35 per cent, vegetables are up 2 and grains are up 15, and now a severe drought in China's wheat-producing regions is threatening shortages and rising prices for that staple.

"We have to raise all of [the prices] by one yuan each, or else we'll have no profit," said Mr. Cui, a 42-year-old from Hebei province who took over the space one year ago. "Definitely all the food we have to buy is getting more expensive."

Skyrocketing food prices have helped propel China's inflation beyond official targets for the fourth time in as many months, according to a recent report by the National Bureau of Statistics. The overall findings, though slightly lower than economists' earlier forecasts, increase the likelihood of further tough monetary controls by a government that fears social unrest as a result of rising food prices.

Producer price inflation was also up, at 6.6 per cent year on year, compared to 5.9 per cent in December.

The numbers are worrying for other major economies looking to China as both a largely untapped consumer market and a source of cheaply made goods for export. Despite Chinese government efforts to increase domestic consumption, much of the economy still depends on exports; inflationary pressures driving up the cost of labour and materials may force some companies into cheaper markets in Vietnam and Philippines and threaten China's economic growth, which hit 9.8 per cent annualized in the last quarter of 2010.

"This is not necessarily bad news. It's good news for the workers. The question is whether the [wage] increase can outpace inflation," said Mei Jianping, a professor of finance at Beijing's Cheung Kong Graduate School of Business.

The value of the Chinese currency may also come into play. The yuan has traditionally been kept low to support Chinese exports and the People's Bank has thus far resisted most pressures to let the yuan appreciate significantly against the U.S. dollar. But a stronger yuan would make imports of raw materials and staple goods more affordable; in a note to clients, Royal Bank of Canada's investment arm said inflationary pressure should help the case for a faster appreciation of the yuan, potentially to as high as 6.20 against the U.S. dollar by year's end from about 6.60 now.

Though the inflation numbers are alarming by North American standards, some observers say they should be taken in the context of a fast-growing, developing economy.

"We don't think China's at risk of inflationary blowout," said Andrew Batson, research director at GaveKal-Dragonomics. "China is not the U.S. or Europe … China's growing much, much faster, so it shouldn't be surprising."

Still, food inflation is a major concern at home, where, despite incredible economic growth, hundreds of millions of people still live in poverty. Earlier this month, the Chinese Premier, Wen Jiabao, said the government would tackle inflation by reinforcing the food supply and stabilizing prices.

"The government is keenly aware of the inflation risk and is taking steps to address the issue. The question is whether these measures are enough and whether more measures will come," Prof. Mei said. "It is likely we will see more severe measures down the road," he continued, including further interest rate hikes and tightening on bank lending.

Outside a grocery store in eastern Beijing, Mei Xuerong, 77, said she was already taking her own measures against inflation, buying cabbage, carrots and pears – selling for four yuan a kilo – instead of apples and strawberries. "Everything is more expensive. Toilet paper, dishwashing liquid," said the red-toqued pensioner, cheerful despite getting by on 1,000 yuan a month ($152).

"I have felt the pressure from the prices. Some items, if they are more expensive, I have to think whether I can really afford it. If they are very expensive, I buy less or don't buy them at all," Ms. Mei said. "But at my age, I don't have high expectations like the young people do."

Special to The Globe and Mail

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