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Inflation reaches three-year high

China's inflation rose to a 37-month-high in July, adding to pressure on Chinese leaders to cool living costs while keeping economic growth on track as the US and European outlook worsens.

Consumer prices in the world's second-largest economy rose 6.5% over a year earlier, up from June's 6.4%, data showed.

That was driven by a 14.8% jump in food costs, up from June's 14.4% and well above the government's 4% target for the year.

The jump in prices came despite a slowdown in manufacturing and other economic activity in July following repeated interest rate hikes and other curbs imposed to cool an overheated economy.

Beijing has to strike a difficult balance between stopping inflation and easing its controls to support Chinese companies as US and European demand weakens, said IHS Global Insight analyst Alistair Thornton.

"They're in a really tough position now," Mr Thornton said. "If they want to start loosening (monetary policy) and buoying up growth, they could face the risk of compounding higher-than-desired inflation."

Analysts blame the inflation spike on the dual pressures of consumer demand that is outstripping food supplies and money surging through the economy from a bank lending boom that helped China ward off the 2008 global crisis.

Rising prices, especially for food, are politically dangerous for the Communist Party because they erode economic gains that underpin its claim to power.

Beijing is trying to rein in economic growth that surged to 9.5% in the quarter that ended in June just as the United States, Japan and other governments are struggling to shore up their own lagging economies.

Premier Wen Jiabao, the country's top economic official, expressed confidence in June that inflation was under control. But he later acknowledged it would overshoot the official 4% target for the year.

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