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China Economy

China’s inflation rate eases slightly in July, expanding scope for monetary policy boost

Consumer price index rose 1.8 per cent in July, a slower increase that may encourage central bank to cut lenders’ cash requirements, say analysts

PUBLISHED : Tuesday, 09 August, 2016, 10:26am
UPDATED : Tuesday, 09 August, 2016, 11:29pm

China’s consumer inflation slowed last month, giving the central government more leeway to ease monetary policy to boost the economy, according to ­analysts.

The consumer price index rose 1.8 per cent in July compared with the same month last year, the ­National Bureau of Statistics said on Tuesday. But the figure was down on the 1.9 per cent increase in June.

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Economists said the drop might encourage the central bank to cut how much cash the banks have to hold in ­reserves to increase liquidity as growth slows in the mainland’s economy.

The move was more likely than a cut in interest rates as they were already at relatively low levels, analysts said.

We think more stimulus measures are still on the table if there are more signs of a weak economy
Li Huiyong, economist, Shenwan Hong­yuan Securities

Data also showed producer prices fell again in July, increasing the likelihood of the government introducing economic stimulus measures.

“The data today showed mild inflation and we think more stimulus measures are still on the table if there are more signs of a weak economy,” said Li Huiyong, chief economist at Shenwan Hong­yuan Securities. “The proactive fiscal policy and relatively accommodative monetary policy will remain.”

Food prices increased 3.3 per cent in July, compared with a 4.6 per cent gain the previous month.

Prices of pork rose 16.1 per cent, compared with a 30.1 per cent increase in June.

Non-food prices inched up 1.4 per cent in July versus June’s 1.2 per cent gain. The producer price index, or PPI, dropped 1.7 per cent from the same month a year earlier, compared with a fall of 2.6 per cent in June.

The figures extended a falling streak to 52 consecutive months, although the rate of decline slowed, suggesting strains on firms’ profits may be easing.

Some analysts said that while stimulus plans were still on the cards, the narrowing PPI drop could reduce the need for immediate action.

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Liu Xuezhi, a senior researcher at Bank of Communications, said producer prices could rebound and rise in the fourth quarter on government stimulus measures and continued efforts to retire obsolete production capacity.

“The base effect and the stabilisation of commodity prices will help improve the PPI,” Liu said.

Producer prices, however, would only strengthen after significant progress in cuts in excess production capacity, he said.

Liu said the central bank would roll out loosening monetary measures if more indicators pointed to weak economic performance.

The government is due to release further economic data on Friday, including figures for industrial output, retail sales and private investment.

The central bank last cut interest rates on October 23.