Inflation China's primary threat: EU official
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"It's important for the Chinese government to keep inflation under control," Gertrude Tumpel-Gugerell, member of the Executive Board of the European Central Bank, said Friday in Shanghai.
In May, the consumer price index (CPI), an index of inflation, rose 3.1 percent compared with the same month last year, overtaking the government's inflation target of 3 percent for this year.
China's CPI increased by 2.2 percent in the first quarter from the previous year and rose 2.8 percent in April from a year earlier, data from the National Bureau of Statistics (NBS) shows.
"CPI figures cannot reflect the overall inflation situation in China. Inflation has been showing up in the real estate and stock markets since July 2009," said Gao Yi, an analyst with Shanghai-based Oriental Securities.
China's producer price index (PPI), a measurement of inflation in wholesale prices, rose 7.1 percent year-on-year in May.
The PPI grew 6.8 percent year-on-year in April, 5.2 percent year-on-year in the first quarter and a 5.9 percent in March.
"Policymakers will hike interest rates in the third quarter if the inflation rate still goes up," said Sun Junwei, analyst with HSBC.
"China will raise interest rates twice this year, each time by 27 percentage points," Wang Qian, chief China economist with JP Morgan.
Last month, the National Development and Reform Commission asked the country's major coal companies to keep coal prices stable, another effort to curb worsening inflation.
Some industry insiders expect oil prices, another key input factor for inflation, might drop this month as international crude price slides.
The People's Bank of China, the central bank, announced further reform on the yuan exchange rate regime before last week's G-20 Summit to increase flexibility, another move to address inflation.
In further proceeding with the reform, continued emphasis would be placed on reflecting market supply and demand with reference to a basket of currencies.
Although China has moved into a managed floating exchange rate regime based on market supply and demand with reference of a basket of currencies since July 2005, the yuan has been pegged to the dollar since the financial crisis hit.
"It's about time for the exchange rate reform," said the EU's Tumpel-Gugerell.
