China's inflation jumped to a 32-month high in March and the world's second-largest economy grew rapidly despite official efforts to cool politically sensitive prices, fueling expectations of more interest rate hikes and other controls.
Consumer prices rose 5.4 percent over a year ago, driven by 11.7 percent surge in food costs, data showed Friday. That was up from February's 4.9 percent and a setback for communist leaders who say taming inflation is their priority this year and have raised interest rates four times since October.
"They will have to step up their fight against inflation," said Credit Agricole CIB senior economist Dariusz Kowalczyk.
Inflation, driven in part by Beijing's massive stimulus to ward off the 2008 global crisis, is a political threat to the Communist Party because it erodes the public's gains from economic growth, possibly triggering unrest. Food prices are especially volatile in a society where poor families spend up to half their incomes on food.
Adding to price pressures, the economy grew by 9.7 percent in the first three months of the year, according to the National Bureau of Statistics. That was almost even with the previous quarter's 9.8 percent and defied government efforts to steer China's expansion to a sustainable pace after last year's double-digit growth.
"The government cannot seem to slow the economy down," said IHS Global Insight analyst Alistair Thornton in a report.
China's challenge is a sharp contrast with problems facing the United States and other major economies. While they struggle with lackluster growth and deflation, Beijing is trying to keep growth and prices from spiraling out of control.
China rebounded quickly from the global crisis on the strength of a $586 billion stimulus and a flood of lending by state banks. But that sparked demand that has outstripped supplies of food and other goods. The lending boom pushed up real estate and stock prices, prompting fears of an asset bubble.
Analysts expect at least one more rate hike in coming months and for Beijing to allow a faster rise in China's yuan against the dollar. That would make oil and other imports cheaper in Chinese currency terms. Still, many analysts expect inflation to rise further through at least midyear before easing.
More drastic measures to cool growth and prices could have global repercussions if they cut into demand for iron ore from Australia and Brazil, factory machinery from the United States and Europe and other foreign goods.
March inflation was the highest since July 2008, when prices rose 7.1 percent.
China's top economic official, Premier Wen Jiabao, called Thursday for more efforts to cool inflation. The comments were unusually pointed for such a senior official and reflected mounting official urgency about controlling living costs.
Wen cited surging housing costs despite government controls and rising public expectations of higher inflation, the official Xinhua News Agency reported. Such expectations can propel to higher wage demands and retail price increases.
"We need to skillfully handle the relationship between promoting economic growth and curbing inflation," Wen said at a Cabinet meeting, according to Xinhua.
The sharp jump in food costs came at a time when prices usually fall as spring harvests start to come in, indicating inflation pressures are unusually strong.
"We are seeing continued very strong growth momentum," Kowalczyk said. "The government has not succeeded in containing inflation, despite increases in interest rates. So they will have to do more."
Also in the first quarter, retail sales rose 16.3 percent over a year ago.
Spending on factories, real estate and other fixed assets rose 25 percent in March despite government investment curbs.
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