China inflation surges 6.5%

China said today its politically sensitive inflation rate rose 6.5% in July to its highest level in more than three years, as the government struggles to rein in soaring food costs.

The country's consumer price index rose 6.5% last month compared to a year earlier, the National Bureau of Statistics (NBS) said in a statement, the highest level since June 2008 when the inflation rate reached 7.1%.

The July reading is likely to fuel concern among policymakers anxious about inflation's potential to trigger social unrest, and about instability in the Chinese economy at a time of renewed global financial peril.

China has been struggling to tame inflation despite restricting the amount of money banks can lend on numerous occasions and hiking interest rates five times since October.

Food prices were up 14.8% in July, the NBS said.

Higher food prices are likely to hurt low-level income earners the hardest, as foodstuffs account for more than one-third of the monthly spending of the average Chinese consumer, according to the bureau.

But analysts said inflation was now close to a peak and forecast it would fall back later in the year as Beijing's efforts to rein in prices kicked in.

"The encouraging thing about today's data is that headline CPI inflation is up only slightly this month after a big jump higher last month," said Brian Jackson, senior strategist at the Royal Bank of Canada.

The July rate was up 0.5% month-on-month, while CPI in June had risen 6.4% from the same month of 2010.

"We think inflation is close to a peak and will head lower later in the year as base effects turn favourable and the impact of previous policy measures kicks in," Jackson said.

"Beijing will obviously be worried about external weakness and global market volatility, but with inflation still too high for comfort we continue to expect one more rate hike in the next few months."

China's producer price index (PPI) for July, a measure of inflation at the wholesale level, was up 7.5% year-on-year, the NBS said, up from 7.1% in June.