August 11, 2011

The rise of China's July consumer price index (CPI) to a three-year high was likely driven by a rapid increase in pork prices, which have shot up 57% this year due to rising feed costs, analysts said.

However, Chinese pig farmers have responded by upping their litters and prices are now expected to soften towards the end of the year. The Chinese government has also dipped into its strategic pork reserves to calm the market.

Some observers have suggested there could even be a glut.

Economists have fretted that China's high rate of inflation could limit the ability of monetary policymakers to cut interest rates and stimulate the economy in the event of a double-dip recession.

However, most economists agreed that inflation has peaked and would now trend slowly downwards.

"July will quite likely mark the peak in the latest inflation upturn and further ahead we expect the moderation in the headline CPI… to become more notable from October onward, and likely to end the year at about 4.3%," analysts said.

Meanwhile, Citigroup forecast that hog prices will likely stay high for the rest of this year, but see a significant decline in the first quarter of 2012 due to rising hog supply.

According to its survey, most hog farmers have raised more breeding hogs since March and April 2011. It takes about 3-4 months for breeding hogs to give birth and it takes another six months for piglets to grow to commodity hogs. That means hog supply is likely to increase in February-March 2012.