China’s inflation sinks to 30-month low, lifting stimulus hopes

9th August 2012

In the month of July, consumer prices in China rose by 1.8% on a year on year basis, down from 2.2% in June and a 3% rise in May.

According to the BBC, the drop in prices of pork and meat and poultry products, which fell by 18.7% and 6.1% from a year earlier respectively, was the key drivers of the slowdown in the rate of inflation.

Analysts say the slowdown in the growth of consumer prices may give policymakers in Beijing more room to use both fiscal and monetary tools to prop up growth – which slowed to an annualised 7.6 per cent in the second quarter, its slowest pace since the bottom of the global financial crisis three years ago.

"This number gives more room for policy easing," said Zhang Zhiwei, chief China economist at Nomura in Hong Kong.

"It is now pretty clear that CPI will likely be below the official 4pc target for the year, so the policy focus for the government can stay clearly on growth."

But even as the deceleration in consumer prices opens the window for more stimulus, some economists warn that policymakers will have to act real fast because the window for further rate cuts may be closing.

Dariusz Kowalczyk, a senior economist at Credit Agricole in Hong Kong said: "Room for policy easing is limited by the fact that July will likely be the bottom for consumer price index  inflation in year-on-year terms, and producers' price index deflation does not have much further to deepen."

Kowalczyk adds that month-on-month consumer prices have actually risen marginally, showing that demand is probably turning around and "we expect CPI inflation to rise from now on, reaching 3.8 percent at the year-end."

Likewise, Alistair Thornton, an economist with IHS Global Insight in Beijing, says Chinese policymakers need to act soon because while inflation is continues to slowdown, it is unlikely to remain at low levels for long.

"Authorities are no doubt aware that this is the time to act," Thorton said. "Inflation will not recede forever, as the People's Bank of China has indeed warned, with recent fears centered around the knock-on effects of climbing soy bean prices."

Nevertheless, Simon Rabinovitch, the FT's economics reporter in Bejing, contends that the spending binge in 2009 when the government pushed through a Rmb4tn ($585bn) stimulus programme – which ultimately created high inflation and a surge in local government debts – means that Beijing has been much more reluctant to launch a similarly big stimulus this time around.

"Moreover, the job market, though weakening, has held up relatively well, alleviating the need for major policy support for the economy. With China embarking on a once-in-a-decade leadership transition later this year, the government is focused on ensuring that the economic and social backdrop is as trouble-free as possible."

Meantime, The Wall Street Journal reports that Asian markets climbed on Thursday after China's inflation rate slowed and Australia's unemployment rate fell.

The Nikkei in Japan was up 1.2% while the Hang Seng in Hong Kong advanced 0.8%. The Shanghai Composite in China was up 0.2% while the Kospi in South Korea gained 1.6%.


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