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China inflation rises sharply to 4-month high in May: govt Data eases concerns about deflationary risks

BEIJING, June 10, (AFP): China’s annual inflation rose sharply in May to its highest level in four months, official data showed Tuesday, easing concerns about deflationary risks in the world’s second-biggest economy. The consumer price index increased 2.5 percent year-on-year last month, accelerating from 1.8 percent in April, the National Bureau of Statistics said in a statement. It was the highest figure since January also saw CPI rise 2.5 percent. The May figure matched the median forecast in a poll of 15 economists by the Wall Street Journal and was mainly driven by rises in food costs, particularly a 20-percent surge in fruit prices, the NBS said. Despite the rebound, CPI was still well below the 3.5 percent annual target set by Beijing in March. April’s price decline had raised concerns the Chinese economy, a key driver of world growth, faced deflationary pressure. The news also comes 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.

Deflation
“Today’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 measure of costs for goods at the factory gate and a leading indicator of the trend for CPI — also improved to a decline of 1.4 percent in May, the NBS said in a separate statement. That was up from a decrease of 2.0 percent in April and marked the highest level since December, when PPI was also minus 1.4 percent, according to official data. Moderate inflation can be a boon to consumption as it encourages consumers to buy before prices go up. In contrast, as Japan has seen, falling prices encourage consumers to put off spending and companies to delay investment, both of which act as brakes on growth.

Bank of America Merrill Lynch economists Lu Ting and Zhi Xiaojia attributed the pickup 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 in a note, but added that “the acceleration is not sustainable as the base effect is one off and the momentum of further pork price increase is weak”. They expect CPI to stay around 2.5 percent in the next few months with PPI picking up. In the first five months of the year, CPI increased 2.3 percent from the same period in 2013, the NBS said. The positive inflation data came after figures for May showed renewed vigour in China’s manufacturing sector, with official and private surveys indicating an improving situation.

China’s gross domestic product grew 7.4 percent in the first three months of 2014, weaker than the 7.7 percent recorded in October-December and the worst pace since a similar 7.4 percent expansion in the third quarter of 2012. Beijing has introduced a number of measures to spur growth, including the reserve requirement ratio cut, financial support for small companies and targeted infrastructure outlays. But it has so far refrained from more aggressive steps such as interest rate cuts, citing worries about excessive credit.
The central bank’s announcement Monday on the reserve ratio cut followed a similar move in April, but avoided an across-the-board easing. It signalled that no significant policy loosening is in the pipeline, in spite of some economists’ calls for more forceful relaxation.

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

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