China's turbo-charged growth eased just a touch in the first quarter, while its inflation jumped to a 32-month high, putting pressure on the government to do more to rein in prices and keep the economy on an even keel.

China's gross domestic product increased by 9.7 percent in the first quarter from a year earlier, down from 9.8 percent in the final three months of 2010 but ahead of an expected 9.5 percent pace.

Consumer price inflation sped to 5.4 percent in the year to March, the fastest since July 2008 and topping market forecasts for a 5.2 percent increase.

Taken together, the data published by the National Bureau of Statistics on Friday showed that the world's second-largest economy was still sizzling, little hindered by the central bank's half-year tightening campaign that many investors had feared would undermine growth.

They were also another reminder of the yawning gap that has opened up between China, the world's fastest-growing major economy, and developed nations from United States to Europe that are still struggling to kick-start their economies after the global financial crisis.

The figures show that (China's) inflation pressure will not taper off in the short term and we expect the consumer inflation to remain high in the second quarter, said Sun Miaoling, an economist with CICC, the largest Chinese investment bank.

The government will keep battling inflation as its priority in coming months, which could prompt the central bank to further tighten its monetary policies, she added.

The People's Bank of China has increased benchmark interest rates four times since last October and has required the country's big banks to lock up a record high of 20.0 percent of their deposits as reserves.

Global markets registered little impact from the Chinese data, in large part because the numbers had been comprehensively leaked in the days prior to the official release.

The main Chinese stock index in Shanghai was down 0.5 percent after morning trading and share prices throughout Asia were also slightly softer, with investors braced for Beijing's next round of tightening. Many analysts believe the central bank could increase required reserves again as soon as this weekend.

TIGHTENING NOT DONE

Inflation had long been expected to run higher in March because of a lower base of comparison. The base effect also suggests that inflation is likely to level off in the coming months before jumping again in June and July, though officials are confident that it will wane in the second half of the year.

Accepting this relatively sanguine view, many economists had thought that the central bank was near the end of its tightening cycle. The median forecast of Reuters poll last week was for just one more interest rate increase over the rest of this year.

But with growth still cruising near double digits, the scope for the government to continue tightening may be bigger than previously anticipated.

Signaling a potentially hawkish stance in the coming months, Premier Wen Jiabao said this week that the government would use all tools at its disposal to wrestle inflation under control.

We will try every means to stabilize prices, the top priority of our economic controls this year and also our most pressing task, Wen said at a cabinet meeting.

Agricultural prices have been the main driver of Chinese inflation and that remained the case, with food costs up 11.7 percent in the year to March. But there were also signs of a broadening of pressures, with non-food inflation up 2.7 percent year on year, the fastest in more than a decade.

The risk is that high oil prices will keep headline inflation stronger for longer, said Brian Jackson, economist with Royal Bank of Canada in Hong Kong.

This also suggests that policy rates still need to move higher in the months ahead, with Beijing also likely to favor further currency appreciation to help get inflation lower, he said.

While keeping a tight grip on the yuan, China has steered its exchange rate to a succession of record highs against the dollar in recent days, using a stronger currency to blunt the impact of high import costs.

REBALANCING?

The first-quarter data also offered a glimpse of the Chinese rebalancing that is needed to put the global economy on more stable footing.

From the World Bank to Chinese leaders, the consensus has long been that China needs to promote more domestic consumption and cut its reliance on both exports and energy-intensive investment.

That finally appears to be happening. Consumption contributed 5.9 percentage points to China's first-quarter growth rate, while investment added 4.3 percentage points, the statistics agency said. Net exports actually subtracted 0.5 percentage points, weighed down by a $1 billion trade deficit, China's first quarterly deficit in seven years.

It remains to be seen how much of the apparent rebalancing was a product of soaring global oil costs, which both boosted China's import bill and inflated consumption in price terms.

Speaking at a business forum in southern China on Friday, President Hu Jintao said that the country's economic model was still out of kilter.

Over the next five years China will make a great effort to boost domestic demand, especially consumer demand, he said.

(Additional reporting by Aileen Wang, Huang Yan and Kevin Yao, and Ben Blanchard and Zhou Xin in Boao; Writing by Simon Rabinovitch; Editing by Ken Wills)

China Inflation