By Song Hongmei (Chinadaily.com.cn)
Updated: 2007-07-10 16:20

China's consumer price index(CPI) in June may have exceeded 4 percent from a year earlier due to higher food prices, making it the strongest inflation reading since October 2004, said China Business News today, citing domestic securities analysts.

According to statistics from the Ministry of Agriculture, the price of agricultural products rose by a further 4.9 percent month-on-month in June, which means the CPI rose more than 0.3 percent, said Yang Yonguang, an analyst with Guohai Securities.

Given that the CPI last June fell 0.5 percent and grew by 3.4 percent in May, the figure for June may stand at 4.2 percent despite a seasonable decline in vegetable prices, explained Yang.

Lin Chaohui, an analyst with Guotai Junan Securities, said the CPI in June would surpass 4 percent as there was usually a seasonal decline in food prices in June. But this year's food prices rose dramatically instead and the prices of other consumer products have not dropped significantly.

Related readings:  M2 growth underestimates inflation pressure  PBOC: Financial stability enhanced Pork price rise alone won't affect CPI much: Economists  Report: Liquidity high but manageable

The price of pork continued to soar in the second half of the year, climbing as high as 20 yuan (US$2.63) per kilogram last week in some local markets, more than 30 percent higher than that of just a few months ago.

Analysts said as a result, pressure for the government to address the issue of negative real interest rates will intensify, which will lead to a higher likelihood of new monetary measures to be adopted in the near future.

Lin predicted that the government will cut the interest rate in July and increase benchmark interest rates in August.

The CPI growth shows a sign of overheating in the economy and a 4 percentyear-on-yearlevel is already passing a warning line the government would withstand, the newspaper said, citing a research report from Shenyin Wanguo Securities analyst Li Huiyong.

Li expected another interest rate hike in the third quarter of this year to curb excessive investment and action might be taken as early as July 18 when the CPI data will be released.

An unidentified analyst with CITIC Securities said a 4 percent year-on-year increase for CPI in June does not necessarily mean another interest rate hike is on the way as tightened monetary measures will not bring down pork prices.

CPI growth was driven by fluctuations in international grain prices, said a pricing official with theNational Development and Reform Commission.

The growth of the biofuel industry in developed countries has pushed up demand for corn and soy, resulting in sharp rises in grain prices in the international market. These price rises have, in turn, spilled over into the domestic market, affecting the costs of eggs, meat, poultry, milk and cooking oil, the official added.

Rising costs in the animal husbandry sector is another factor behind the grain price rises, he explained. Pork prices, which are estimated to account for 7 percent of the CPI basket, surged in the first half due to tight supply, due to blue ear disease causing a mass culling of pigs, the official said.