Jump in inflation limits scope for policy easing

Inflation on the mainland unexpectedly accelerated last month as consumer spending jumped to a three-month high during the week-long Lunar New Year holidays, limiting scope for monetary easing.

The consumer price index (CPI), a key gauge of inflation, rose 4.5 per cent year-on-year in January, the National Bureau of Statistics said yesterday. The rate outstripped economists' forecast of a 4 per cent rise, and came after a 4.1 per cent rise in December and a 4.2 per cent rise in November.

Despite the upward blip, which interrupted a series of figures suggesting that inflation was in retreat after hitting a 37-month high of 6.5 per cent in July, economists said the underlying trend in 2012 was still downwards.

Ting Lu, a China economist at Bank of America-Merrill Lynch, said the rise was a one-off and only temporary.

He said the this year's Lunar New Year festival came nearly a week earlier than it did last year, affecting the year-on-year comparison base. The holiday ran from January 22 to January 28 this year.

'Investors definitely should not read too much into the inflation [figures],' Lu said. Merrill Lynch expected China's CPI inflation rate to drop to around 3.3 per cent in February, he said.

Yu Song, a China economist with Goldman Sachs, said the data would probably set off alarm bells among some policymakers but it would not necessarily cause a change in policy.

Tao Wang, chief China economist with UBS Securities, said the rise in the January CPI could make policymakers somewhat more cautious about monetary easing for the moment. 'It is still difficult to discern the real strength of the economy. The market should not expect any reserve requirement ratio cut as a signal for easing in the next weeks,' Wang said.

Peng Wensheng, chief economist with China International Capital Corporation, said the higher-than-expected CPI limited the scope for monetary easing in the near term.

'Even if January's rebound was an aberration, the fact that it was well above the market expectations may caution policymakers to hold off policy loosening,' Peng said.

'There is less possibility that the central bank will cut the reserve requirement ratio in February.'

Markets shrugged off the figures. Shenzhen was up just over half a percentage point, but Shanghai's and Hong Kong's benchmark indices were largely flat.

Despite the blip in prices, Qi Jingmei, a senior economist with the State Information Centre, said the authorities needed to cut the reserve requirement ratio. Economists are predicting and investors are hoping that policymakers will loosen monetary policy after the People's Bank of China's decision in December to make its first reserve requirement ratio cut in nearly three years.

Food prices, which account for nearly one third of the basket of goods in the nation's CPI calculation, climbed 10.5 per cent year-on-year in January and contributed 3.29 percentage points in January's CPI rise. The increase accelerated sharply from December's 9.1 per cent rise.

Month-to-month, the mainland's CPI increased 1.5 per cent in January, the NBS said.

Despite the CPI rebound, the country's producer price index, a main gauge of wholesale inflation, only increased 0.7 per cent in January year-on-year, down from 1.7 per cent in December, and was the lowest rise since December 2009.