Dip in mainland inflation may ease monetary curbs

PUBLISHED : Saturday, 10 March, 2012, 12:00am
UPDATED : Saturday, 10 March, 2012, 12:00am


The mainland's consumer inflation fell sharply last month, and other key economic indicators dropped early in the year. Together, they suggest a dramatic slowdown in economic growth and give policymakers more room to stimulate demand given continuing concerns about sluggish US growth and the euro-zone crisis.

The consumer price index rose 3.2 per cent year on year last month, a 20-month low, after rising 4.5 per cent in January, and the producer price index was flat, compared with a 0.7 per cent year-on-year increase in January, the National Bureau of Statistics said yesterday.

Growth in capital investment slowed to a 10-year low and factory output growth fell back to its lowest since July 2009, while retail sales also cooled more than forecast in the first two months of this year. The numbers confirm that China, the biggest single contributor to global growth, is also losing steam.

'The inflation story is over,' said Sun Junwei, a China economist with HSBC.

Alaistair Chan, an economist with Moody's Analytics, said diminishing inflation pressures gave government scope to ease monetary policy.

Hopes that Beijing might soften its monetary stance lifted Asian markets, with Hong Kong's benchmark Hang Seng Index rising 0.89 per cent and the Shanghai Composite gaining 0.79 per cent.

Song Yu, a China economist with Goldman Sachs, said he believed policymakers were now more concerned about growth risks, given yesterday's data.

'At the same time, the larger-than-expected fall in CPI/PPI inflation is likely to alleviate the concerns they have on policy loosening,' Song said.

Sun said the latest data left the People's Bank of China with fewer excuses for not softening its stance in order to promote growth - especially given the sharp slowdown in exports so far this year. 'Get ready for more steps towards policy easing after the NPC meeting,' she said, referring to the National People's Congress, which winds up its annual session on Wednesday.

However, Lu Ting, the chief China economist with Bank of America-Merrill Lynch, sounded a cautionary note, saying inflation had been 'artificially tamed' in the past because the government had controlled many prices.

'With falling CPI inflation, Beijing is likely to seize the opportunity to raise regulated prices such as power tariffs and may even carry out other price reforms,' Lu said.

Data from two months was released together by the NBS to minimise distortions from the timing of the Lunar New Year holiday, which in some years falls in January and in other years in February.

In the first two months, the CPI was up 3.9 per cent compared with a year earlier. On a month-on-month basis, the CPI fell 0.1 per cent in February, the NBS said.

Inflation has declined steadily from the 37-month peak of 6.5 per cent in July last year, but rebounded in January, sparking concerns that price pressure had not been extinguished. But economists said the week-long Lunar New Year holiday in January boosted food prices that month, an effect which was then reversed last month.

The government's official target calls for holding inflation below 4 per cent this year.

Food prices, which account for nearly one-third of the weighting in CPI's calculation, increased 6.2 per cent last month from a year earlier, compared with a 10.5 per cent rise in January. The price of pork, the nation's staple meat, jumped 15.9 per cent year on year after surging 25 per cent in January.