Relief as Chinese inflation speeds up

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br chinaauto Bloomberg Vehicles on a road in Shanghai. China has introduced a number of measures to keep fuelling economic growth, including another cut in the reserve requirement ratio, which the central bank announced on Monday. The Beijing government has taken other stimulus measures as well, such as financial support for small companies and targeted infrastructure outlays. The pick-up in May's consumer inflation to an annual rate of 2.5 percent, as indicated in the data release yesterday, is a good sign. Moderate inflation can be a boon to consumption as it encourages consumers to buy before prices go up. In contrast, falling prices encourage consumers to delay spending - as happened in Japan until recently. Photo: Bloomberg

Beijing - China’s annual inflation rate rose sharply in May to its highest level in four months, official data showed yesterday, easing concerns about deflationary risks in the economy.

The consumer price index (CPI) increased 2.5 percent year on year last month, accelerating from 1.8 percent in April, the National Bureau of Statistics said. It was the highest figure since January’s rate, which was also 2.5 percent.

The May figure matched the median forecast of economists and was mainly driven by rises in food costs.

Despite the rebound, CPI was still well below the 3.5 percent annual target set by Beijing in March. April’s price slowdown had raised concerns that the Chinese economy faced deflationary pressure.

The news came a day after the People’s Bank of China announced details of a cut in the amount of cash certain lenders must keep with the central bank (the reserve requirement ratio) as part of a limited stimulus to boost spending.

Yesterday’s “inflation data confirm our view that broader price pressures are stable and that concerns about deflation, sparked by a short-lived fall in headline inflation in April, were overplayed”, Julian Evans-Pritchard, an analyst with Capital Economics, said in a research note.

The producer price index (PPI) – a leading indicator of the trend for CPI – improved to a decline of 1.4 percent in May, the statistics bureau said.

That was up from a decrease of 2 percent in April and was the highest level since December, when the PPI also declined 1.4 percent year on year.

Bank of America Merrill Lynch economists Lu Ting and Zhi Xiaojia attributed the pick-up in CPI to a low comparison base and rising pork prices.

“We believe that the threat of deflation in China is quite small,” they said, but added: “The acceleration is not sustainable as the base effect is one off and the momentum of further pork price increases is weak.”

They expected CPI to stay around 2.5 percent in the next few months, with producer inflation picking up.

The central bank’s reserve ratio announcement on Monday followed a similar move in April, but avoided an across-the-board easing.

It signalled that no significant policy loosening was in the pipeline, in spite of some economists’ calls for a more forceful relaxation.

“Generally, the current liquidity situation is moderately ample and the basic stance of the monetary policy is unchanged,” it said.

China’s leaders say they want consumer spending and other forms of private demand to propel the economy into a future of more sustainable, albeit slower, growth.

The new model would steer the Chinese economy away from an over-reliance on huge and often wasteful investment projects that have girded decades of past expansion. – Sapa-AFP

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