http://business.timesonline.co.uk/article/0,,16849-2571398,00.html

The head of the International Monetary Fund has dismissed fears that a jump in China's inflation could portend higher prices on shop shelves worldwide.

Annual consumer price inflation accelerated to 2.9 per cent in December from 1.8 per cent in November. The increase suggested that four consecutive years of double-digit growth were finally generating price pressures that Chinese exporters of everything from toys to televisions would pass on to their global customers.

However, speaking in Beijing on Friday, Rodrigo de Rato, IMF managing director, said that the fund did not expect inflation to be a problem in 2007. He said: "We don't see a short-term risk to price stability in China."

China's central bank, another fount of monetary orthodoxy, also played down December's figure. Yi Gang, an assistant governor, said that a low base of comparison with the year before had exaggerated the increase. Mr Yi stood by the central bank's forecast that consumer prices in 2007 would rise by no more than 3 per cent compared with an average of 1.5 per cent in 2006.

The central bank is relaxed because December's jump was thanks largely to higher grain prices, which most economists expect to be a passing phenomenon that will not ripple through the economy.

Core inflation over the past five years has remained extremely stable at less than 1 per cent, according to Jonathan Anderson, chief Asian economist at UBS, the Swiss investment bank. Indeed, Chinese policymakers worry as much about deflation as they do about inflation. Companies in China are still on an investment binge, creating supply gluts in industries including steel, aluminium and cars.

Stephen Green, of Standard Chartered Bank in Shanghai, said that talk of inflation was hype. He said: "Given that China exports manufactured goods, not food [with a few exceptions], and manufacturing exports are still overall in deflation, then the immediate consequences for central bankers around the world are limited."

The risks of higher inflation spring mainly from two sources. Wages are rising sharply in the exporting boomtowns of southern China and, with higher prices of raw materials, are likely to pass gradually through into higher selling prices.

With credit expanding fast, asset prices are also a concern. The Government is worried about a stock market bubble after Shanghai's 130 per cent rise last year. The authorities have responded by suspending the launch of new mutual funds, telling investors to beware and ordering banks to make sure that loans are not used for punting on stocks.

Property prices are still rising fast, putting flats beyond the reach of many aspiring first-time buyers, so the Government has started to enforce a land appreciation tax and is considering introducing rates.