China’s Inflation Rose To 7.1% In January

HONG KONG — Consumer prices rose 7.1 percent in China last month, the largest increase in more than a decade.

The steep increase in prices, announced on Tuesday morning by the Chinese government’s National Bureau of Statistics, is the latest warning sign that China has been transformed from a moderating influence on global prices to a source of inflationary pressure.

Yu Yongding, the influential director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences and until 2006 a member of the monetary policy committee of China’s central bank, said that high inflation in January meant that the Chinese government was likely to continue pursuing austerity policies.

To fight inflation, China is likely to allow its currency to “appreciate continuously” so as to hold down the cost of imports, despite signs that economic slowdowns in the United States and elsewhere may cool demand for Chinese exports, Mr. Yu said.

“Inflation is the No. 1 enemy for China,” he said in a telephone interview. “It’s affordable for us to sacrifice a little on the growth side to bring inflation under control.”

Chinese exporters are trying to pass on their rising costs to overseas customers, which could contribute to inflation in the United States and Europe.

“Our company is faced with rising labor costs and raw material costs,” said Michelle Yin, a sales manager for the Shanghai Yongqiu Compressor Company, which makes walk-in coolers and freezers and exports to the United States and Europe. “Depending on the margin we get from individual customers, we have been able to pass on all or part of the cost increase. For new customers, we typically have to set prices more aggressively to get their business.”

Food prices led the increase again in January, climbing 18.2 percent. Economists had expected a sharp increase, partly because last year’s harvest was poor for many crops and partly because snowstorms began to hurt food production and distribution in late January.

But inflationary pressures now seem to be accelerating and spreading more broadly across the Chinese economy. Consumer prices jumped 1.2 percent just from December to January. And nonfood prices were up 1.5 percent from a year earlier in January.

The consumer price inflation figures released on Tuesday morning came after a separate release of statistics on Monday showing that Chinese producer prices, measured when goods leave a factory, rose 6.1 percent in January from a year earlier. Chinese economists attributed the increase mainly to higher prices for fuel and other raw materials.

But price increases are also spreading to services, where prices were up 2.6 percent, a sign that labor costs are also starting to climb.

Yu Song and Hong Liang, two Goldman Sachs economists, warned in a research note that most of the effects of the Chinese snowstorms in late January and early February did not show up in the January data. They said that inflation in February was “likely to be much higher than 7 percent, and might even get close to double-digit levels.”

The two Goldman Sachs economists and Stephen Green, the chief China economist at Standard Chartered Bank, said that the Chinese government would continue to pursue austerity policies aimed at controlling inflation.

Mr. Green predicted that Chinese authorities would raise interest rates four times in the second and third quarters of this year and said that another increase was “imminent” in the proportion of assets that banks are required to hold as reserves, which limits lending.

Consumer price inflation in January was the highest since September 1996, when Chinese inflation was still declining after running at well over 20 percent in the mid-1990s.

Food prices increased sharply despite the government’s imposition of complex price controls on Jan. 15 on many foods, including pork, eggs, flour and cooking oil.

The government still has in place a separate ban, imposed on Sept. 19, on price increases in a long list of government-regulated industries, from airlines to electric utilities.

Some economists have suggested that prices may be rising even faster in China than government statistics indicate, because industries subject to price controls may be concealing the true extent of their price increases. The government also faces the dilemma that leaving price controls in place could erode incentives for farmers and others to produce more goods, while lifting price controls could result in even higher inflation.

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