China's consumer price index (CPI) rose by 6.5 percent in August propelled by food price hikes, the biggest monthly rise this year, triggering divergent opinions on China's inflationary prospects.

Joerg Wuttke, chairman of the European Union Chamber of Commerce in China, said China's CPI had been driven up by rising food prices while the country's core CPI, excluding food and energy prices, was below one percent.

Latest figures from the National Bureau of Statistics (NBS) showed the accumulative increase of the main gauge of inflation reached 3.9 percent in the first eight months, overshooting the three-percent target set by the government earlier this year.

A report by Changjiang Securities said the country was likely to raise the interest rate again in September. Li Maoyu, an analyst with the securities firm, said the central bank would raise the benchmark interest rate to a level in line with inflation.

Yao Jingyuan, chief economist with the NBS, said the CPI was unlikely to grow drastically in the coming months and could drop in the fourth quarter.

The August CPI figure exceeded the 5.8-percent prediction of Li Huiyong, a senior analyst at Shenyin & Wanguo Securities, but matched that of the DBS Bank which said in its latest report that August's CPI would exceed six percent.

Food prices ballooned by 18.2 percent in August, followed by consumer goods, which jumped by eight percent. Meanwhile, the prices of non-food products rose 0.9 percent, said the bureau.

Grain prices went up by 6.4 percent, cooking oil prices 34.6 percent, meat and poultry 49 percent, eggs 23.6 percent, aquatic products 6.2 percent, and fresh vegetables 22.5 percent, but fresh fruit prices dipped by 3.3 percent, said the bureau.

China's producer price index (PPI) for manufactured goods was up 2.6 percent in August over the same period of last year. The PPI of consumer goods jumped 3.5 percent, and the price index of food swelled by 8.6 percent, compared with the growth rate of 1.2 percent for garments and 1.8 percent for daily commodities, said the NBS on Monday.

Analysts said rising producer prices had driven up consumer prices. The CPI increased 5.6 percent in July, 4.4 percent in June and 3.5 percent year on year in the first seven months of this year, according to the NBS.

Last week, Bi Jingquan, vice director of the National Development and Reform Commission, said China's price hikes in the first seven months were mainly caused by food price hikes. The country is capable of maintaining the overall price stability after food prices are properly addressed, he stressed.

Increasing inflationary concerns intensified expectations of further rate hikes though the country has just ordered banks to set aside more as reserves for the seventh time in less than a year.

The People's Bank of China (PBOC) announced the decision last week to raise the reserve requirement ratio by 0.5 percentage points for commercial banks to 12.5 percent starting from September 25, in a bid to "control excessive bank lending".

The move came after China reduced the tax on interest income to five percent from 20 percent from August 15 and raised the benchmark interest rate four times this year.

To reduce liquidity in the banking system, the Ministry of Finance has increased the issue of treasury bonds.

The country's commercial banks lent 2.77 trillion yuan (US$369.33 billion) from January to July, equivalent to 90 percent of last year's total.

(Xinhua News Agency September 11, 2007