China's cost-of-living rate rose at a faster-than-expected pace in November, presenting monetary officials with a dilemma: Should they raise interest rates again and risk more speculative money inflows that exacerbate inflation?

The Consumer Price Index, the main gauge of inflation, surged to a 28-month high of 5.1 percent from a year earlier, according to figures released by the National Bureau of Statistics on Saturday. The increase beat market forecasts of a 4.8 percent rise and outstripped the 4.4 percent gain in October.

For the first 11 months of the year, the inflation rate was 3.2 percent, surpassing the People's Bank of China maximum target of 3 percent for 2010.

The rising cost of living is hitting household budgets hard. Food prices in November surged 11.7 percent from a year earlier, amid a lot of public grumbling about the cost of feeding families.

On the day before the CPI figures were announced, the central bank raised its reserve requirement ratio for the sixth time this year and the third time in five weeks.

Starting from December 20, commercial banks will be required to set aside 18.5 percent of their capital. The tougher rule, which will reduce the amount of funds banks have available to lend by 360 billion yuan (US$54 billion), is intended to help mop up excessive liquidity in the economy.

That was a wise move, said Wang Qing, a Morgan Stanley economist.

"The reserve requirement rise is superior to bill issuance in locking up a large amount of liquidity for the longer term, without redemption pressure," Wang said.

Increasing the reserve requirement is considered a more benign way to tackle inflation than raising interest rates. Many analysts had predicted another rate rise. Chinese officials may be worrying about opening the gates to more speculative funds chasing higher rates.

"Policymakers are on alert about the floods of funds in global markets after the United States further eased its monetary policy," said Li Maoyu, an analyst at Changjiang Securities Co.

"When many countries are keeping their interest rate near zero to stimulate their economies, China can't risk one more rate increase," Li added.

On October 20, China announced a surprise 25-basis-point increase in interest rates to 5.56 percent on one-year money. Li said he doesn't expect another one this year.

But Lu Zhengwei, an economist at Industrial Bank Co, said policymakers would be wise to lift rates just one more time this year.

"It would demonstrate the government's determination to combat inflation," Lu said.