China's annual inflation spiked unexpectedly in March to 3.6 percent driven by rising food prices, data showed on Monday, surprising investors who had bet on cooling price pressures to give Beijing room to ease monetary policy.
But quickening inflation in March may not dissuade Beijing from the view that price pressures in China are in retreat and that support for a slowing economy is the top priority.
We see that pork prices have come down a bit so we think this is a short-term rebound, the trend is still headed lower, said Li Wei, an economist at Standard Chartered in Shanghai.
March was a relatively cold month in the north so that may have contributed to food CPI being stronger than expected.
Economists polled by Reuters had forecast China's consumer inflation to run at 3.3 percent in March from a year ago.
Producer prices were down 0.3 percent on the year, compared with market expectations for a 0.2 percent fall.
With price pressures in the world's second-biggest economy expected to stay restrained for the rest of the year, in part due to high year-ago comparison figures, analysts say China is in good stead to meet its 4 percent inflation target for 2012.
That gives China's central bank ample scope to unwind some of its strident tightening between 2010 and 2011, when it raised interest rates five times and the amount of cash banks are required to hold as reserves 12 times.
A Reuters poll showed economists think Beijing could cut banks' reserve requirement ratios (RRR) by another 150 basis points before December to 19 percent to encourage banks to lend more to cash-strapped firms.
Underlining slowing food inflation, official data showed pork prices fell every week in March and have shed 10 percent in the past two months. Pork is a staple meat in Chinese diets and a key component of food inflation.
And though China raised retail gasoline and diesel prices in March by 6-7 percent, analysts say that has limited direct impact on overall inflation as they believe energy carries a small weight in China's consumer price index basket.
(Reporting by Koh Guiqing; Editing by Alex Richardson)