Inflation in China at an 11 year high.

China’s inflation has bounded to 8.7 percent as adverse weather, which is the worst on record for over half a century has crippled the food supply and sent prices soaring.

Food cost are now 23 percent higher than last year as huge swathes of crops have been destroyed and transport links severed resulting in huge shortages across the country.

The government has announce that they want to cap price gain at 4.8 percent for 2008, although they acknowledge that due to the storms and instability and unpredictability of the situation they have caused it is more difficult to control full-year inflation.

Andy Xie, former Chinese economist as Morgan Stanley said that interest rates must be increased by a least two or three percent this year, as the deposit rare of 4.14 percent is less than half the current rate of inflation.

There is increased sensitivity to the issue within industry that is an integral part of the expanding Chinese economy.

With food representing a third of the consumer-price index, prices such as a 63 percent increase of pork, and 46 percent for vegetables within the year are having a serious knock on effect.

Yang Yuanguing, chairman of Lenovo Group Ltd said that: “we are worried that rising prices in China as well as a possible rise in interest rates may increase our labor costs and add pressure to production costs.”

The government has now taken a number of measures such as instructing food companies Uni-President Enterprises Corp (an instant-noodle maker) to attempt to freeze prices with any changes needing to be sanctioned.

As Tao Dong rightly points out, “If food inflation stays high for too long this will trigger non-food inflation because If your food bill keeps going up, you ask for a raise – then your boss raises his product prices.”

The Chinese government is well aware of this relationship as is the central bank who have pushed up the banks reserve requirements.

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