China's inflation soars to 8.5%

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BEIJING (AP) — China's inflation almost climbed to a 12-year high last month, swamping official efforts to cool surging living costs that could provoke unrest ahead of the Beijing Olympics.

The government, which took further steps yesterday to tame the inflation, faces the possibility of more sharp price spikes, some analysts warned.

"Underlying inflationary pressures remain undiminished," Goldman Sachs economists Yu Song and Hong Liang said in a report.

The government ordered banks to increase their reserves for a fourth time this year in a move meant to contain inflation by curbing lending, but it gave no indication whether it would boost interest rates.

April's consumer prices rose at an 8.5 percent annual rate, the National Bureau of Statistics reported. That was an increase from March's 8.3 percent rate but below February's 8.7 percent — the highest in 12 years.

Prime Minister Wen Jiabao has said taming inflation is Beijing's priority. The government said in March it hoped to hold price increases to 4.8 percent this year — a target that looks increasingly unlikely.

Inflation jumped in mid-2007 as China ran short of pork, grain and some other food items. The government has assured the public that the country has enough grain and is paying farmers to raise more pigs. But efforts to boost food supplies were disrupted by severe winter storms.

April inflation was driven by a 22.1 percent jump in food prices, including 68.3 percent for pork over April 2007, 46.6 percent for cooking oil and 13.6 percent for vegetables.

"Recent surges in global grain prices increase the risk that domestic grain prices may lead [to] another wave of food price inflation in the months to come," Lehman Brothers economist Mingchun Sun said in a report to clients.

Beijing has imposed price controls on basic food items. But costs of energy and raw materials are rising, adding to pressure for producers to pass along higher prices to consumers. Producer prices, an indicator of future inflation, rose 8.1 percent last month.

Chinese families spend up to half their incomes on food, compared with the 5.8 percent that U.S. shoppers spent on average on food in 2006, according to the U.S. Department of Agriculture.

Rising food prices in China, coupled with surging housing costs, are eroding income gains from an economy that expanded by 10.6 percent in the first quarter.

But bouts of high inflation in China in the 1980s and 1990s sparked protests — a scenario that the government is eager to avoid as it prepares for the Summer Olympics in August, meant to showcase China as a prosperous, stable society.

In an effort to curb inflation, the government has raised interest rates repeatedly and has tried to shrink the amount of money available for lending by forcing banks to set aside more reserves.

The latest order yesterday by the central bank boosted the amount of deposits that banks must hold in reserve by 0.5 percentage point to 16.5 percent — the highest to date.

But economists say Chinese bank deposits are growing so fast that such modest reserve increases have no direct impact on lending and are meant as a signal to bankers to reduce credit.

Also yesterday, customs data showed China's trade surplus fell by 1 percent last month. That could help to ease inflation pressure by reducing the amount of money flooding into the booming economy.

China's global trade surplus fell to $16.8 billion amid weaker demand for Chinese goods, according to the Chinese customs agency.