Inflation eases, paving way for stimulus steps

PUBLISHED : Tuesday, 10 July, 2012, 12:00am
UPDATED : Tuesday, 10 July, 2012, 12:00am


Mainland inflation cooled more than expected last month to its lowest level in nearly 21/2 years, reflecting weak demand and pointing to more policy easing in the months ahead.

The consumer price index (CPI) rose 2.2 per cent in June from a year earlier, the slowest pace since early 2010, and down from a 3 per cent rise in May, according to the National Bureau of Statistics.

The producer price index (PPI), a gauge of factory prices, dropped for the fourth consecutive month by 2.1 per cent in June from a year earlier, fanning worries that deflation may have taken hold in the world's second-largest economy.

'Inflation is unlikely to rebound in the short term,' clearing the way for the government to ease policy, said Peng Wensheng, an economist at China International Capital Corp.

While moderating prices is good news for social stability, policymakers must now focus on economic growth and maintaining employment ahead of a once-in-a decade-leadership change set for autumn.

'The Chinese government will not ignore growth risks in this critical year of leadership transition,' Barclays economists said.

The central bank has just cut interest rates twice in a month to spur a flagging economy. Economic data to be issued later this week for June as well as the second quarter are likely to show the economy grew slower than anticipated. In the first quarter, the economy expanded 8.1 per cent from a year earlier, the weakest performance in three years.

Yesterday, mainland and Hong Kong stock markets lost ground, with the Shanghai Composite Index falling 2.37 per cent and the Hang Seng Index dropping 1.88 per cent.

Month-on-month, overall CPI was down 0.6 per cent last month from May. The cost increase of food slowed significantly to 3.8 per cent year-on-year in June, from a 6.4 per cent rise in May, while non-food inflation remained at 1.4 per cent, the same as May.

The PPI fell 0.7 per cent in June from May, dragged down by slumping global commodity prices, amid the European debt crisis and sluggish domestic demand.

'Driven by external and internal headwinds, domestic demand remains weak,' said Zhu Haibin, an economist at JPMorgan Chase Bank. 'The government has adopted and will continue to introduce fiscal and monetary measures to ensure stable economic growth in the second half of this year.'