Inflation in China rose by the highest monthly level in more than two years in May, the National Bureau of Statistics (NBS) reported on Tuesday.

The consumer price index (CPI) rose 3.4 percent in May over the same month of last year, higher than the government's warning level of three percent, according to a statement from the NBS.

Food price hikes were still the leading driver of inflation, rising 8.3 percent over May last year. Grain prices rose 5.9 percent, meat and poultry 26.5 percent, and eggs 37.1 percent, said the statement.

Foodstuffs have a weight of 33 percent in China's CPI, one of the key indicators of inflation, and meat, poultry and related products about 20 percent.

The CPI rose three percent in April, down slightly from March's 3.3 percent. In the first five months of this year, the nation's consumer inflation increased 2.9 percent from the same period in 2006, according to the bureau.

Construction material prices climbed 4.8 percent, with the cost of home rental jumping by 3.4 percent. The prices of water, electricity, and fuel also rose by 2.8 percent.

The rise in consumer prices was higher in the country's rural regions at 3.9 percent, compared with 3.1 percent in urban areas.

"The slight rise in the CPI was expected as it was mainly driven by price rises of grain and pork," said Song Guoqing, professor with the China Economic Research Center of Beijing University, who also advised the central bank against raising interest rates.

Zhou Xiaochuan, governor of the People's Bank of China, said on June 6 that the bank would not rule out the possibility of adopting a mixture of monetary tools to keep inflation at bay.

Liang Hong, chief China economist of Goldman Sachs Asia, previously raised the forecast of China's inflation in 2007 from 2.6 percent to 3.6 percent, higher than the target of three percent set by the government for the whole year.

The People's Bank raised the one-year deposit rate by 0.27 of a percentage point to 3.06 percent and the loan interest rate by 0.18 of a percentage point to 6.57 percent on May 19 amid efforts to reduce inflationary pressures and rein in rapid growth in investment.

Qi Jingmei, an analyst with the State Information Center, said the latest figure showed an increasing likelihood that the central bank will raise interest rates to combat inflation pressures. However, given the effect of raising the stamp tax on securities trading, it was better to cancel deposit interest tax rather than hiking interest rates for economic and market stability.

Source: Xinhua