China's factory-gate inflation spurts to 6.6 pct

Factory-gate prices in China rose in February at the fastest rate in more than three years, cementing expectations of a leap in consumer inflation to which the central bank may have to respond by raising interest rates.

China's annual producer price inflation rose to 6.6 percent in February from 6.1 percent in January, the National Bureau of Statistics said on Monday.

That was the highest rate since 7.1 percent in December 2004 and a touch above economists' forecasts of 6.5 percent.

"This will contribute to a rise in consumer inflation. The pass-through from agricultural prices to processed food prices will continue. Inflationary expectations are also on the rise, and expectations can change consumer behaviour," said Jun Ma, chief China economist at Deutsche Bank in Hong Kong.

February's consumer price index will be released on Tuesday.

Economists polled by Reuters expect an increase of 8.0 percent, up from 7.1 percent in the year to January, as the impact of severe winter weather that disrupted transport and energy passes through the supply chain and pushes up food prices in particular.

"Virtually everything is on the rise -- not just fuel, but coal and iron ore -- all these things are growing much stronger than fuel, plus labour costs are going up too," Ma said.

Wholesale food prices rose 11.0 percent in February from a year earlier, while prices of raw materials, fuel and power were up 9.7 percent.

"We think inflation is likely to exceed expectations for now and for longer," Ma said.

Premier Wen Jiabao, in his annual work report to parliament last week, declared the battle against inflation to be his government's top priority despite clouds over the outlook for global growth.

Accelerating inflation will increase pressure on the central bank to raise interest rates for the first time this year following six increases in 2007. Bank deposit rates are already well below the inflation rate, which is at an 11-year high.

Wen hopes to keep inflation this year below 4.8 percent, last year's rate, but sky-high global prices for oil, grain and other commodities will make that a tough task.

"The government is trying hard to keep a lid on key grain prices, but there is no sign that international cereal prices will ease," said Zhao Qingming, an economist with China Construction Bank in Beijing.

"Because of a weakening dollar, crude oil prices are also likely to remain high, which would translate into higher costs for Chinese producers," Zhao said.