December 12, 2006

China's inflation rises as grain costs go up

Inflation in China increased more than expected in November as food costs increased at the fastest pace in almost two years, according to 21 economists surveyed by Bloomberg News.

Food costs, which account for a third of the consumer price index, jumped 3.7 percent after climbing 2.2 percent in October, thanks to a 4.7 percent increase in grain prices .

Headline inflation is quite benign and mostly affected by agricultural products but is not much of a problem for the central bank, said Tao Dong, chief Asia economist at Credit Suisse Group in Hong Kong.

Corn and wheat prices rose to 10-year highs recently as droughts in the US and Australia cut crop yields. The cost of grain has been rising in China as state traders prepared to increase exports and cut domestic supplies, said Nie Ben, manager at Liao Ning Cifco Futures Co. in Dalian.

However, food prices are "volatile'' and are not likely to cause inflation to skyrocket, said Qian Wang, an economist at JPMorgan Chase & Co. in Hong Kong.

China, which controls its yuan within a very narrow band, should allow faster currency appreciation to prevent export-driven money inflows from worsening inflation, the Organization for Economic Cooperation and Development said last month. China's trade surplus rose by almost two-thirds to a record US$168 billion this year.

By allowing the currency to appreciate, China could help lower the import cost of food, economists said.