Submitted by China Economy Watch Blog

China’s consumer price inflation clung near a 12-year high in April, maintaining pressure on the government to stick to its tight policy stance in spite of softening global growth. For authorities who have insisted their priority is to tackle price rises, the quickening of annual inflation to 8.5 per cent from 8.3 per cent in March will be frustrating, while also allowing them a glimmer of optimism.

Apart from February’s reading of 8.7 per cent, inflation was last higher in May 1996, when the rate was 8.9 per cent. Food prices, which make up a third of the consumer basket, have been the overwhelming driver of inflation. They rose 22.1 per cent in April from a year earlier, though weekly government reports on fresh food prices have showed a slight dip in May. Non-food prices rose 1.8 per cent in April from a year earlier, the same as in March.

Zhou Xiaochuan, China’s central bank governor, said on Saturday that the country would give precedence to tackling inflation over targeting growth or employment. Even as easing food prices give some grounds for hope, pipeline pressures have built up with the producer price index, or factory-gate inflation, hitting a three-and-a-half year high of 8.1 per cent in April. This followed an 8 percent gain in March and was the quickest pace since November 2004.

China’s producer prices rose 7.2 percent from a year earlier, the statistics bureau said. Purchasing prices jumped 11.8 percent in April from a year earlier and gained 10.3 percent in the first four months.

Producer prices of ferrous metals jumped 24.8 percent in April from a year earlier, after rising 21.2 percent in March, the statistics bureau said. Gasoline prices climbed 10.8 percent after gaining 9.9 percent and clothing costs increased 2.3 percent after climbing 2 percent.

Higher wages and energy and commodity costs led a third of manufacturers to raise prices in April, according to a survey by CLSA of more than 400 purchasing managers. The Labor Contract Law, imposed on Jan. 1, mandates minimum wages and limits overtime work. The average wage in Chinese urban areas climbed 18 percent in the first quarter from a year earlier to 6,524 yuan ($932).

The government declared it would tighten monetary policy this year to fight inflation, but it has yet to raise interest rates after six increases in 2007.

Instead, it has drawn on an array of tools, from bank lending curbs to faster yuan appreciation – the central bank on Monday set the highest daily reference rate for the yuan, 6.8920 per dollar, since it ended a fixed peg to the US currency in July 2005.