The producer price index (PPI), which measures price changes at factory gate, increased 8.2 percent year-on-year in May, the fastest pace in nearly four years.
The index rose 8.1 percent in April. It increased 7.4 percent year-on-year for the first five month compared with 7.2 percent for the January-April period.
PPI is a leading indicator of inflation as production cost rises are passed onto consumers within six months, economists say. The rising PPI figure in May, therefore, may indicate heavy pressure on the CPI in the coming months though the inflation index is expected to drop for May, analysts said.
The CPI may rise by 7.7 percent year-on-year in May, down from 8.5 percent in April, according to media reports. The National Bureau of Statistics (NBS) is scheduled to release the CPI figure today.
"The rise in producer price inflation will seep into the consumer price inflation zone and mount pressure on policymakers battling inflation," said Guo Tianyong, economist with Central University of Finance and Economics. "The time taken to pass on the higher costs may vary between enterprises and sectors, but the effect is always the same."
It is therefore hard, he said, for the authorities to relax the tight monetary policy in place.
Over the weekend, the central bank raised the reserve requirement ratio, or proportion of money lenders must set aside in reserve, by a whole 1 percentage point - usually it adjusts the ratio by half a percentage point.
"It was a pre-emptive move by the central bank, a sign that inflation may remain serious in the medium term as liquidity continues to pile up," Guo said.
Xu Xianchun, deputy head of NBS, reportedly said inflation "may peak next year".
In the PPI basket, the producer price of gasoline rose 11 percent in May, compared with a 10.8 percent rise in April.
As international oil prices keep rising, some believe China must liberalize its refined oil prices to save billions of yuan in subsidies.
"The liberalization would have only a one-off impact on inflation growth," said Ma Qing, economist with the China Economic Business Monitor, an investment advisory firm. "It can anchor public inflationary expectations."
Source: China Daily
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