Chinese inflation hits three-year high

China’s inflation rose to a 37-month-high in July, adding to pressure on Chinese leaders to cool living costs while keeping economic growth on track as the US and European outlook worsens.

Consumer prices in the world’s second-largest economy rose 6.5% over a year earlier, up from June’s 6.4%, data showed today.

That was driven by a 14.8% jump in food costs, up from June’s 14.4% and well above the government’s 4% target for the year.

The jump in prices came despite a slowdown in manufacturing and other economic activity in July following repeated interest rate hikes and other curbs imposed to cool an overheated economy.

Beijing has to strike a difficult balance between stopping inflation and easing its controls to support Chinese companies as US and European demand weakens, said IHS Global Insight analyst Alistair Thornton.

“They’re in a really tough position now,” Mr Thornton said. “If they want to start loosening (monetary policy) and buoying up growth, they could face the risk of compounding higher-than-desired inflation.”

Analysts blame the inflation spike on the dual pressures of consumer demand that is outstripping food supplies and money surging through the economy from a bank lending boom that helped China ward off the 2008 global crisis.

Rising prices, especially for food, are politically dangerous for the Communist Party because they erode economic gains that underpin its claim to power.

Beijing is trying to rein in economic growth that surged to 9.5% in the quarter that ended in June just as the United States, Japan and other governments are struggling to shore up their own lagging economies.

A survey by HSBC Corp released earlier showed manufacturing contracted in July for the first time this year. HSBC’s purchasing managers index fell to a 29-month low of 49.3 on a 100-point scale on which numbers below 50 show activity contracting.

Inflation has climbed steadily despite five interest rate hikes since October 2010 and government curbs on lending and investment. Analysts expected it to peak by midyear and then decline, but prices for pork and vegetables spiked up after summer floods wrecked crops in China’s south and east.

The price of pork, China’s staple meat, rose 56.7% in July over a year earlier, the National Bureau of Statistics reported. Eggs rose 19.7% and fresh vegetables were up 7.6%.

The overall price rise was the fastest since June 2008’s 7.1%.

Premier Wen Jiabao, the country’s top economic official, expressed confidence in June that inflation was under control. But he later acknowledged it would overshoot the official 4% target for the year.

The World Bank raised its forecast of China’s economic growth in April from 8.5% to 9.3% and said Beijing should tighten monetary policy further to cool prices.