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China says June inflation eases but energy costs keeping up pressure for higher prices

By JOE McDONALD | AP Business Writer

10:19 AM EDT, July 17, 2008

BEIJING (AP) _ China's inflation eased to 7.1 percent in June but high energy and other costs are fueling pressure for more price rises, the government said Thursday, and analysts said Beijing is likely to maintain tight credit controls despite a slowing economy.

The trick for Chinese leaders is to stall surging prices that have battered Chinese families, but not cause the economy to cool too rapidly. Their task has been made more difficult by weakening U.S. demand for China's exports.

"I think the tricky thing for us is to find the ideal balance point," said National Statistics Bureau spokesman Li Xiaochao at a news conference. He said prices rises were still "fairly high" and gave no indication Beijing considered the problem solved.

June's rise in consumer prices compared with the same month last year was down from May's 7.7 percent increase, the National Bureau of Statistics said. It said the economy grew by 10.1 percent in the three months ending June 30, compared with 10.6 percent the previous quarter. That's in line with government efforts to prevent runaway growth, it added.

"It's not a simple message. It's more like we are at the stage where we need to be very cautious," said Lehman Brothers economist Mingchun Sun. "I think we need to be very cautious about both inflation and the growth outlook."

Communist leaders worry about a possible political backlash if sharp price rises continue. Bouts of high inflation in the 1980s and '90s sparked protests, a scenario they are eager to avoid ahead of the Beijing Olympics in August, which it hopes will showcase China as stable and prosperous.

Economists said Beijing is unlikely to ease tight monetary policy, though they expect it to slow the rise of its currency, the yuan, in the second half of the year. That could help struggling exporters, which saw growth in demand for Chinese goods drop in June.

"Keeping inflation expectations in check could still be one of the authorities' top policy priorities for the very near term," said JPMorgan Chase & Co. economic Frank X. Gong in a report to clients.

Chinese consumer prices began to rise sharply in mid-2007 due to shortages of pork and grain. The government initially expressed confidence inflation would start to fall by the end of that year. But efforts to control prices were hampered by severe winter storms that wrecked crops and disrupted shipping.

Rapid rises in the cost of oil, grain and industrial raw materials could fuel a rise in consumer prices, Li said. He said wholesale prices rose 8.8 percent in June, up from May's 8.2 percent rate, adding to pressure on retailers to raises prices.

"Although headline inflation may have peaked for the time being, attention is now focusing on the build up of inflationary pressure in nonfood categories," said Jing Ulrich, chairwoman of China equities for JPMorgan, in a report to clients.

The government gave no June figure for food prices, but said they rose 20.4 percent in the first half over the year-earlier period. JPMorgan estimated June's food price rise at 17.5 percent, compared with 19.9 percent in May.

Separately, China's main planning agency, the National Development and Reform Council, said inflation in housing prices, another key government concern, slowed slightly in June but that costs in 70 major cities still were up 8.2 over the year-earlier period.

"We need to keep in mind all this growth was achieved despite weakening global demand and very tight credit conditions in China," said Lehman's Sun. "Growth is a concern, but probably still of lesser concern than inflation."