Inflation edges up in China

China’s inflation rose slightly in March, tempering confidence that China can turn to stimulus should its slowing economy falter in the coming months.

Rising food and fuel prices helped drive China’s consumer price index up 3.6% from the same month a year earlier, China’s National Bureau of Statistics said Monday. That was a modest rise from the 3.2% annual rate in February.

China raised its retail prices for gasoline and diesel March 20 for the second time in six weeks -- hikes that probably contributed to the rising food costs.

Food prices grew 7.5% in March, driven largely by a jump in the cost of vegetables such as green onions, which were damaged by poor weather. (China National Radio reported one restaurant declining to serve kung pao chicken because the vegetable, a key ingredient, was too expensive.)

Although the increase in inflation came in higher than many analysts expected, it remained lower than China’s annual target of 4% and well below last July’s three-year high of 6.5%.

The world’s second largest economy is expected to have grown 8.4% in the first quarter, which would mark its slowest pace of expansion in nearly three years. Officials are scheduled to announce economic data Friday.

At the risk of scaling back growth too far, Beijing is trying to reduce the country’s unsustainable rate of fixed asset investment at the same time exports are declining because of softer demand from Europe.

So far, policymakers have resisted significantly easing credit or lowering interest rates. The central bank lowered reserve requirements for the nation’s lenders Feb. 24 to boost liquidity in the economy, but that may not be enough, experts say.

“The main risk now to the government’s cautious monetary stance is that the modest cuts in reserve requirements so far are not enough to allow banks to meet their lending targets, as the shrinking trade surplus and reversal of capital inflows tighten domestic liquidity,” said analysts at GaveKal Dragonomics, a China-based economic research firm, in a note to clients released Monday.

Premier Wen Jiabao “also said investment cannot slow too much without dragging down consumption with it, comments that reinforce the government’s desire for a gradual transition away from investment-led growth,” the note continued.

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