SHANGHAI - China's annual consumer price index (CPI) may reach 4.5 percent in the first quarter and peak this year in the second quarter, the official Shanghai Securities News reported on Monday quoting a research report.

Ample outstanding liquidity in the system, banks continuing the heavy lending seen over the past few years and yuan cash injections by the central bank to keep the currency stable were the main factors keeping inflation high, the report by the Renmin University of China was quoted as saying.

Fighting inflation is a priority for China and the government must ward off threats to social stability stemming from rapid price increases and pressure to raise the value of the yuan, Premier Wen Jiabao said on Sunday.

"The momentum for prices to continue rising still has its foundations in a relative abundance of liquidity in 2011," the research report said.

Prices of China's agricultural products were likely to rise and the country will also be faced with imported inflation propelled by high global commodity prices derived from loose monetary policy by major economies including the United States, the report said.

But China had already normalized its monetary policy since late last year from the previous two years' loose stance, so there "is not a base for inflation to develop into a malicious cycle this year", the report was quoted as saying.

"The CPI will fall after reaching a peak in the second quarter," the report said.

China's annual inflation accelerated to 4.9 percent in January from 4.6 percent in December. Food prices rose 10.3 percent.

To help rein in inflation, China raised interest rates on Feb 8, the third rate increase since Beijing began a monetary tightening cycle in earnest in October.

The People's Bank of China, the central bank, has also raised bank reserve requirement ratios several times, among other steps, to help mop up liquidity in the financial system.

Reuters

(China Daily 03/01/2011 page14)