Chinese inflation hit a lower-than-forecast 4.9% in January, but price pressures excluding food were their strongest in at least a decade and will force the central bank to keep tightening monetary policy.
In a tentative sign that its actions so far, including higher interest rates and lending restrictions, have started to bite, money growth eased to its slowest pace in six months in January at 17.2% year on year.
"The money supply and lending data suggest that government efforts to clamp down on liquidity might be taking hold, though broad-based inflation provides no leeway for the central bank to relax its tightening stance," said Connie Tse, economist at Forecast PTE in Singapore.
Analysts in a Reuters poll had forecast January's inflation at 5.3%, up from 4.6% in December. Contrary to expectations, a change in how the consumer price index is calculated added to the reading, rather than subtracted from it.
In one sign of the accumulating pressures, core inflation, stripped of volatile food prices, jumped to 2.6% year on year, the highest in at least a decade, from 2.1% a month earlier.
In another sign, soaring global commodity costs pushed producer prices up 6.6% in the year to January, up from 5.9% in December and well above the 6.1% rise forecast by analysts.
"The large increase in PPI inflation suggests that price pressures will remain uncomfortably strong, at least for the next few months," said Brian Jackson, economist with Royal Bank of Canada in Hong Kong.
Asian stocks and global commodities edged down, having jumped on Monday when rumours of the lower-than-expected inflation figure first swirled through markets, easing fears that China would need to unleash aggressive monetary tightening.
The Chinese central bank raised interest rates last week for the second time in just over six weeks. It has also raised the amount of money banks have to hold in reserve seven times since the start of last year to try to mop up the excess cash in the economy that has fuelled inflation.
The National Bureau of Statistics said its adjustment in the way it calculates consumer price inflation better reflected the evolution in Chinese consumption patterns.
"February CPI is expected to be about 5.2%, and if it is significantly lower than that, we may conclude that inflation in China has changed fundamentally," said Gao Shanwen, chief economist with Essence Securities in Beijing. "Or we can say that the CPI indicator itself is quite doubtful in terms of reliability."
Housing was given a much larger share of the new CPI basket, while the weighting of food prices was reduced. These changes were consistent with an economy that is fast becoming more prosperous, allowing urbanites to spend a smaller portion of their incomes on basic needs and more on big-ticket items.
Many in the market had expected that the adjustment, conducted every five years, would lower the CPI, but the statistics agency said the adjustment had actually added 0.024 percentage point to January's reading.
At least some investors and analysts took the statistics agency at its word, and said that lower inflationary pressure would reduce the need for a big dose of interest rate increases. China's main stock index was steady after soaring 2.5% on Monday.
Ting Lu, an economist with Bank of America-Merrill Lynch, noted that the biggest surprise was the 10.6% increase in food prices year on year.
Many had thought a larger rise was in store, because the Chinese New Year fell earlier in 2011 than 2010 and that was expected to push up food costs in January.
"The implication here is that inflation pressure might be smaller than the market had thought," he said.
Despite increasing interest rates and raising bank reserve ratios, Chinese officials are still concerned about the rapid expansion of bank lending.
Banks issued 1.04 trillion yuan in new loans in January, a touch below the market consensus of 1.2 trillion yuan, but still a hefty number when inflation is running near its fastest in three years.
"New yuan loans are at the lower end of the market's expected range, indicating that the regulators' tightening measures have yielded some effect," said Wang Hu, an analyst at Guotai Junan Securities in Shanghai.
"But the figure is still very strong and reflects a robust demand for loans in the first month of this year," he added.
As a centrepiece of its economic policy, China sets loan quotas to guide credit issuance by banks. Because of the country's relatively stunted financial markets, these targets are more important than interest rates in controlling the pace of money growth and inflation in the Chinese economy.
Loan quotas took on extra urgency last month because banks began the year by unleashing their customary early-year lending surge at the same time as officials were trying to slow credit expansion to rein in prices.
Another worry for China is a drought that has beset its major wheat-producing region since October, threatening to push up grain prices and fuel further food inflation.
"The unfavourable weather conditions have raised supply-side risks for production of agricultural products, and simultaneously reinforced inflationary expectations," Qu Hongbin, chief China economist at HSBC, said.