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The Globe and Mail

China curbs lending as inflation hits 5.5%

A Chinese vendor waits for customers at a food market in Hefei, east China's Anhui province.


China's inflation has hit its highest level in almost three years, despite government efforts to cool the economy, driven by the rising prices of food and other household basics.

May's consumer price index reached 5.5 per cent, its highest level since August 2008, slightly above analysts' forecasts of 5.4 per cent and well above a national target of 4 per cent this year.

Still driving inflation is the rising price of food, which makes up about 30 per cent of the consumer price index. Food prices climbed 11.7 per cent year on year in May, compared to 11.5 per cent the previous month, after severe drought in the country's south was followed in some places by flooding. But clothing and household items have also seen price increases.

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"This highlights that Chinese households are feeling the squeeze from higher prices for basic necessities, and will likely prompt further public pressure on the government to tackle this problem," wrote analyst Brian Jackson, with RBC in Hong Kong. "We expect that headline measures of inflation will fall later in the year as base effects turn more favourable and policy tightening gains traction, but more increases seem likely in the next few months with risks also growing that price pressures will fail to ease as quickly as Beijing would like."

Soon after the inflation numbers were released, China's central bank lifted the ratio of funds that banks must set aside as reserves by a half point as it attempts to contain the problem.

The increase to the reserve requirement ratio by the People's Bank of China was the sixth this year. The increase in the reserve ratio to a record 21.5 per cent of deposits will take effect June 20, said a notice on the central bank's website.

The numbers follow a growing number of protests across the country, many of them by migrant workers frustrated by low or unpaid wages in an age of rising prices. As a result Chinese authorities are especially keen to keep control of rising prices; further interest rate hikes and tightening of bank lending is expected, along with existing price controls. China has already raised interest rates four times since October and is expected to do so again this month.

Still, analysts suggest the government may find it difficult to meet its inflation target this year.

"It's a very challenging task. Most likely the annual average number will be more than 4 per cent," said Sun Junwei, China economist for HSBC. She predicted inflation may go as high as 6 per cent in June before gradually falling.

With a file from The Associated Press

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