June 12 (Bloomberg) -- China's inflation accelerated to a 27-month high in May as pork prices soared, increasing the likelihood that interest rates will be raised further in the world's fastest-growing major economy.
Consumer prices gained 3.4 percent from a year earlier, the National Bureau of Statistics said today. That was more than the 3.3 percent expected by economists. April's inflation rate was 3 percent, matching the central bank's 2007 target.
The central bank is ``closely'' watching rising food costs and will study the inflation data before any interest-rate change, Governor Zhou Xiaochuan said June 5. A surge in grain costs and a shortage of pigs has pushed up pork prices, raising concern that social instability may follow in the world's biggest consumer of the meat.
``Today's number and the stock market for the past few days make a stronger case for a rate hike,'' said Wang Qing, chief China economist at Morgan Stanley in Hong Kong. ``If loan and fixed-asset investment growth shows continued rebound, the probability for an imminent rate hike is higher.''
The yuan rose 0.21 percent to 7.6468 against the dollar as of 10:10 a.m. in Shanghai, the biggest gain since May 11.
China will probably increase lending and deposit rates at least once more in 2007, a Bloomberg News survey showed. The benchmark one-year lending rate is 6.57 percent and the deposit rate is 3.06 percent after increases last month.
Food Prices
Food accounts for a third of the consumer price index and meat for 7 percent. Meat product prices increased 26.5 percent in May from a year earlier after rising 17.6 percent in April, the statistics bureau said.
Food prices climbed 8.3 percent after increasing 7.1 percent, while prices of consumer goods jumped 3.9 percent after rising 3.4 percent. Non-food inflation was unchanged at 1 percent.
For the first five months, consumer prices rose 2.9 percent from the same period last year, the statistics bureau said.
Record trade surpluses are pumping the financial system full of cash and fueled an 11.1 economic expansion in the first quarter. The May surplus rose 73 percent from a year earlier to $22.45 billion. The People's Bank of China has ordered banks to set aside larger reserves and sold bills to try to rein in the money supply.
Stock Market
Accelerating consumer prices make it harder for the government to cool the stock market because inflation is outpacing returns on bank deposits, encouraging households to switch their money to shares.
``Interest rates are low and that is going to push up asset prices,'' said Paul Cavey, an economist at Macquarie Securities in Hong Kong.
The CSI 300 Index is up 93 percent for the year, after more than doubling in 2006 and former Federal Reserve Chairman Alan Greenspan warned last month of a looming ``dramatic contraction.''
``The stock market is like the place for legal gambling in China,'' said Jim Walker, chief economist at CLSA Asia-Pacific Markets in Hong Kong. ``It's getting dangerous now, with so many people speculating on it that a collapse could lead to social problems.''
The benchmark plunged 6.8 percent on May 30 and 7.7 percent on June 4 after the tripling of a stamp tax on share trading and amid speculation that the government would introduce a capital- gains tax. It's climbed 12 percent in the past five trading days.
``The stamp duty is nothing compared to a capital-gain tax,'' said Jerry Lou, China strategist at Morgan Stanley in Hong Kong. ``The Chinese government should add it soon because they are running out of options.''
India's Inflation
China's inflation rate is running at a slower pace that than of India, the world's second-fastest growing major economy. India's wholesale price index, the key inflation indicator, rose 4.85 percent for the week ended May 26.
In China, overcapacity of manufactured goods and government controls on electricity and fuel help to hold down prices. About 70 percent of 600 consumer goods were in oversupply last year, the Ministry of Commerce said.
China's pork shortage has been exacerbated by outbreaks of Blue Ear Disease, or Porcine Reproductive and Respiratory Syndrome. Premier Wen Jiabao has pledged incentives to boost supply of the staple food in the Year of the Pig.
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