China said Tuesday its politically sensitive inflation rate rose 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 per cent last month compared to a year earlier, the National Bureau of Statistics (NBS) said in a statement, the highest level since June 2008 when it reached 7.1 per cent.

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.

Adding to concerns that the world's number two economy is slowing while prices continue to rise was data showing that industrial output had eased in last month from June.

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, which the bureau has said are likely to hurt low earners the hardest with foodstuffs accounting for more than one-third of the monthly spending of the average Chinese consumer, were up 14.8 per cent in July.

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 curb 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 per cent month-on-month, while CPI in June had risen 6.4 per cent from the same month of 2010. In May, it rose 5.5 per cent year-on-year.

"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."

Mounting public anger over rising food and fuel prices has already caused a series of protests this year.

This month, thousands of taxi drivers in the eastern city of Hangzhou went on strike to demand higher fares and in April, truck drivers in Shanghai stopped work over rising fuel costs, disrupting operations at the city's ports.

Ma Jun, a Hong Kong-based economist with Deutsche Bank, told AFP that Beijing might have to loosen its tightening policies, with growth in the West expected lower than previously forecast given the US and European debt crisis.

"The impact on China's CPI is obviously negative -- it will add downward pressures on CPI as international commodity prices are falling sharply," he said.

"I had predicted earlier policies would be gradually loosened. Now the likelihood for a loosening is even bigger than expected, particularly in the fourth quarter."

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

Output from China's millions of factories and workshops rose 14 per cent year-on-year in July, it said, slightly slower than the 15.1 per cent recorded in June.

Retail sales, the main gauge of consumer spending in the world's second-largest economy, were up 17.2 per cent in July.

Fixed asset investment, a measure of government spending on infrastructure, rose 25.4 per cent in the first seven months of the year, the NBS said.

Premier Wen Jiabao reportedly admitted in June that it would be difficult to keep inflation within the government's target for 2011 but added that fighting rising prices remained a priority.

Beijing had originally set itself the target of maintaining this year's inflation at 4.0 per cent, but Wen later said it would be possible to keep the level under 5.0 with "hard work".

Some analysts are concerned Beijing might go too far in tightening monetary policy and trigger a sharp slowdown in the world's second-largest economy -- which could have dire consequences around the globe.

Alistair Thornton, an analyst with IHS Global Insight, said policymakers were likely to put off further interest rate hikes until the global economic outlook settles.

"Market turmoil and a weakening US outlook will provide a strong case against further tightening," he said in a research note.

"Indeed, many will be arguing for an immediate loosening, given the fears of 'overshooting' that had already been circulating before the recent slide in global confidence."

channelnewsasia.com