Inflation remains high in China, limits Beijing’s policy options

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China’s inflation rate rose to its highest level in more than three years in July, underscoring the problem ahead for the Beijing government if the global economy sinks into another recession.

The country’s consumer price index rose 6.5% from July of last year, coming in slightly higher than expected and up from the 6.4% posted in June, China’s National Bureau of Statistics said Tuesday.

Food prices again led the rise in prices, growing 14.8% from a year earlier. The inflation rate is now showing its highest year-over-year growth since June 2008.

China has been trying to rein in its overheated economy with a combination of interest-rate hikes, increases in bank reserve ratios and stricter homebuying rules.

But the recent plunge in world markets and uncertainty in U.S. and European economies will complicate those efforts now that China could be pulled into another global financial crisis.

In 2008, Beijing was able to use a massive stimulus program and record bank lending to keep its economy charging forward. The result of that aggressive policy is not only an economy that expanded a sizzling 9.5% in the second quarter but also today’s persistent inflation and rising debt brought on by massive investment projects.

Analysts say the central government will now be limited in its ability to shield the country from any major economic contagion -- a worrying thought for those who expected China to lead the global economy onto solid ground.

‘Beijing’s policy response to this kind of a growth slowdown would look much different in 2011 than it did in 2008,’ said Nicholas Consonery, an analyst with the Eurasia Group. ‘Most importantly, the leadership’s hands are more tied on monetary policy. Pressing inflation, along with local government and banking debt concerns, will drive the leadership to avoid renewing monetary stimulus, even if doing so means slower economic growth. Beijing simply does not have another silver bullet in its arsenal.’

-- David Pierson