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Pork and egg price hikes drove up the consumer price index (CPI) to 3.4 percent in May from a year earlier, the highest monthly rise in two years, adding pressure for an interest rate hike.

The May CPI - a key gauge of inflation - surpassed the central bank's annual target of 3 percent for the second time this year after gaining 3.3 percent in March.

According to data released yesterday by the National Bureau of Statistics (NBS), food was the key factor behind the rise as it accounts for about a third of the CPI basket.

Food prices rose 8.3 percent year-on-year in May. The prices of meat, especially pork, and related products rose 26.5 percent and eggs gained 37.1 percent.

The price increases of meat and eggs will "exert further upward pressure on headline inflation" in the coming months, said a note released by Citibank's Beijing Office yesterday.

But their impact is not likely to persist, according to Frank Gong, chief economist of JPMorgan Securities (Asia Pacific), who said in a note on Monday that the supply of pork and eggs "will gradually rise and prices should stabilize".

The prices, however, are not likely to see a steep decline, Zhou Wangjun, an official with the National Development and Reform Commission, said yesterday.

Rises in food prices have raised concerns about the burden on lower-income households, especially rural residents whose spending on food accounts for a larger portion of their total income than urbanites.

"To solve this problem, the government should gradually raise subsidies for lower-income households and lift the minimum wage," said Zhou.

Rising inflation has also added pressure on interest rates since the real deposit rate was negative when inflation reached 3 percent in April.

It has been cited as one of the reasons for household savings being shifted from banks to stocks and real estate.

Many economists believe scrapping the 20 percent tax on bank deposit interest would be a better policy option than a rate hike in the near term since food prices are less sensitive to interest rate changes.

"A rate hike would be bad for the stock market, which has just suffered from the newly imposed stamp duty. Scrapping the interest tax is more useful in terms of attracting deposits from households," said Qi Jingmei, an economist at the State Information Center supervised by NDRC.

In the long run, however, there will be pressure for a rate increase, Chen Jijun, an analyst at CITIC Securities, told China Daily.

(China Daily 06/13/2007 page1)