The National Bureau of Statistics in China has reported that the consumer price index hit 7.1 percent in January from a year earlier, revealing the biggest rise in inflation since September 1996, further accelerating from December's 6.5 percent rise. In the midst of the worst snowstorms in 50-years, economists had expected a fast rise in China's inflation. Food prices rose 18 percent as blizzards halted transport and destroyed crops. The Chinese government now has the heavy task on reducing inflation without compromising the expansion and growth of the world's largest nation.
Consumer Price Index ''could easily reach 10 percent later this year, driven by severe overheating of the economy,'' wrote Charles Dumas, Lombard Street Research economist from London.
The rising Chinese Yuan is now considered by the People's Bank of China as the tool of choice in order to fight China's rising inflation rate. Zhou Xiaochuan, head of China's central bank has repeatedly stated that the Chinese Yuan will gradually reach a balanced level that will help bring an equilibrium to China's balance of international payments. Last year in 2007, the People's Bank of China raised interest rates six times, raised the bank's reserve requirement by ten times and finally another interest rate hike last month.
''We expect no immediate rate hikes from the PBoC as a reaction to today's CPI number,'' wrote Ting Lu, a Hong Kong-based economist with Merrill Lynch.
''However, policymakers are likely to permit fast [Chinese Yuan] appreciation to fight inflation after strong readings of export data,'' Lu said.
Merrill Lynch currency analysts forecast the Chinese Yuan will appreciate 9.6 percent in 2008, compared with 6.8 percent in 2007. Alongside China's fast economic growth and rising inflation, the US Federal Reserve's expansionary stance is also prompting the Chinese Yuan to rise. The People's Bank of China pays 1.31 percentage points more on its six-month bills than it earns on similar-maturity Treasuries after the Fed's five rate cuts since September. Six months ago, the spread was 2.2 percentage points in favor of U.S. debt.
In forex trading, the Chinese Yuan has risen 7 percent in the year 2007. So far in 2008, it has risen 1.9 percent to 7.1623 per US Dollar so far. The Chinese Yuan will be expected to rise further this year.
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