Data fuels China, India inflation worries

Inflation pressures in China and India mounted on Tuesday as data showed manufacturing costs jumped last month, raising the prospect of fresh rate rises.

The news came as the countries' central banks struggle to contain prices and thus avoid social unrest. The economic giants have already announced a series of interest rate hikes and other measures to tame inflation.

Similar strong readings across Asia point to robust growth in the region and add to worries about rising prices.

In China, two purchasing managers' indexes (PMI) showed manufacturing eased again last month as the Lunar New Year holiday hit production levels.

But they also showed that the cost of production surged, with factories blaming rising raw material and fuel prices, which were passed on to customers.

HSBC said its PMI fell to a seven-month low of 51.7 in February from 54.5 in January, while a government survey showed production at a six-month low of 52.2 after 52.9 in January, with a reading above 50 indicating expansion.

HSBC warned input costs had accelerated to a three-month high, while the official report said its input price sub-index rose to 70.1 percent in February from 69.3 percent January, curbing production in some industries.

Costs were likely to rise further, the China Federation of Logistics and Purchasing added, due to a drought in wheat-growing regions and crude prices soaring to two-year highs on the back of unrest in the Arab world.

"Inflation pressures in China have been building even before the latest spike in oil prices, and today's data should further reinforce the case for more policy moves from Beijing in the months ahead," said Brian Jackson, a Hong Kong-based strategist at Royal Bank of Canada.

China has raised rates three times in four months and has announced several increases in the amount of money banks must keep in reserve as it tries to cap prices. At the weekend, it lowered its growth target for the next five years.

But despite such moves, inflation hit 4.9 percent in January, up from 4.6 percent in December and well up from its full-year target of four percent.

The government is keen to keep prices down as it fears unrest similar to that across the Middle East and North Africa that has seen the ouster of two long-term despots.

In India, HSBC's PMI hit 57.9 last month from 56.8 in January, its fastest for three months and Leif Eskesen, HSBC's chief economist for India and the ASEAN area, said input costs had also gone up.

Figures from HSBC on input prices for India and China were not immediately available.

"Growth is holding up well, but unfortunately this is at the cost of rising inflation," he said.

"RBI's tightening will have to continue and we expect another (rate hike of) 25 basis points near term, likely as soon as March."

The data follows news Monday that India's economy expanded 8.2 percent in October-December as it powers out of the global economic downturn.

The central Reserve Bank of India (RBI) has hiked interest rates seven times in less than a year as it tries to curb high living costs.

The Congress-led government is keen to tackle inflation as it has promised to help the country's hundreds of millions of poor.

Tens of thousands of people protested in the Indian capital last Wednesday against surging prices, adding to pressure on the embattled government.

Tuesday's strong PMI figures and rising price pressures will keep the RBI hawkish, with further hikes expected this year, Eskesen added.

Elsewhere in the region, a PMI from the Australian Industry Group-PricewaterhouseCoopers rose 4.4 points in February to 51.1, creeping back into expansionary territory.

HSBC's PMI for Taiwan fell to 55.8 from 59.8 in January, affected by the Lunar New Year holiday but still well in growth territory.

And South Korean exports grew more than expected in February, while headline inflation in Thailand and Indonesia eased slightly but core inflation rose.

Price concerns will likely intensify in April-June due to rising oil costs, "adding to the challenges that policy makers face across the region", said Frederic Neumann, co-head of Asian economic research at HSBC.

"They still need to raise rates, and the danger is that they're behind the curve," he told Dow Jones Newswires.

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