Chinese Inflation Hits the Consumer

We talked a little bit about a near term increase in the Yuan. Inflation pressure appears to be moving from producer prices to CPI. This puts pressure on the government for a rise in interest rates as well as an gradual revaluation up. Probably one of the more intersting financial stories to watch unfold. Via Bloomberg:

“A growing number of households will now realize that their deposits in the banking system are losing purchasing power,” said Ma Jun, chief China economist at Deutsche Bank AG in Hong Kong. The jump in the inflation rate last month “will increase the social and political pressure for a rate hike in the near term.”

February’s reading was likely influenced by seasonal factors stemming from the Lunar New Year holiday and winter storms that pushed up prices, analysts said. At the same time, the rate may rise further, with the median forecast in a Bloomberg News survey last week for a peak of 4.4 percent during the year.

Price Expectations

Since October, the government has highlighted the importance of managing inflation expectations as the nation rebounds from the global financial crisis and commodity costs rise. Eleven of 15 economists surveyed yesterday said that interest rates may rise in March or April.

Barclays Capital yesterday increased its projection for China’s inflation rate this year to 3.5 percent from a previous estimate of 3 percent.

Premier Wen Jiabao aims to hold full-year inflation around 3 percent after banks flooded the financial system with money to drive an economic rebound. Gross domestic product grew 10.7 percent last quarter and People’s Bank of China Governor Zhou Xiaochuan said March 6 that anti-crisis policies, including the yuan’s peg to the dollar, must end “sooner or later.”