China reported stubbornly high inflation and weaker than expected growth data for the month of July, highlighting the policy dilemma facing the country’s leaders as worsening debt crises in Europe and the US hit global markets.

Chinese consumer inflation accelerated to 6.5 per cent from a year earlier, up from 6.4 per cent in June, according to data released by China’s National Bureau of Statistics on Tuesday.

Inflation was driven mostly by volatile food prices, which soared 14.8 per cent in July from a year earlier.

Growth in industrial production, retail sales and investment all came in below expectations last month, but the inflation figure gives Beijing little room to loosen monetary policy.

Since October, Beijing has raised interest rates five times and lifted the amount banks must hold in reserve with the central bank nine times.

Despite the acceleration in price rises last month, most economists believe inflation peaked in July and will moderate gradually.

“The encouraging thing about today’s data is that headline CPI inflation is up only slightly this month after a big jump higher last month,” said Brian Jackson, an analyst at Royal Bank of Canada in Hong Kong. “We think inflation is close to a peak and will head lower later in the year as base effects turn favourable and the impact of previous policy measures kicks in.”

Prices of commodities such as oil are falling amid signs of slumping global growth. Chinese pork prices, a main driver of inflation over recent months, have started to stabilise as more pigs come to market.

Growth in fixed asset investment slowed to 24.5 per cent from a year earlier in July, compared with 25.1 per cent in June and 26.7 per cent in May, according to estimates from Barclays Capital.

Investment in railways contracted 2.1 per cent from a year earlier in the seven months to the end of July, following an increase of 7 per cent in the first half and 18 per cent in the year to May.

The government has reined in investment in the country’s highly ambitious high-speed rail network amid numerous scandals including a crash that killed 40 people last month and corruption investigations into senior officials, including the former rail minister.

Industrial production growth from a year earlier decelerated from 15.1 per cent in June to 14 per cent in July and retail sales slowed to 17.2 per cent in July from a year earlier and from 17.7 per cent in June.

Many economists now believe China continued its tightening bias for too long in 2008 as growth slowed in the West, forcing it to launch an enormous fiscal stimulus package when the global economy went off a cliff in September 2008.

“China’s policy makers will not want to make the same mistake twice,” said Stephen Green, an economist at Standard Chartered in Hong Kong. “But at the same time, they know that inflation could come back quickly – and at the back of their minds they must worry that any move to QE3 from the Federal Reserve could propel commodity prices up.”

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