Consumer price inflation ticked down again in September, being 1.9% year-on-year, down from August’s 2%. That was much as expected and leaves inflation running well below the official target for the year of 4%. Officials have been signaling 2.7% as the likely number for the full year.
That would still appear to leave policymakers plenty of headroom for further easing of monetary policy, should they choose to use it. The central bank has cut interest rates twice since June and lowered banks’ required reserves three times since November. Yet its main way to pump up sagging growth has been to open the liquidity taps. The broad measure of the money supply, M2, grew by 14.8% in September, its most rapid monthly expansion since June last year, and above the central bank’s 14% target number for the year.
However, the liquidity taps have been opened cautiously and with some trepidation by the central bank. Zhou Xiaochuan, governor of the People’s Bank of China, writing in the latest edition of the Journal of Financial Research, a house organ of the bank’s, is talking of closer to home when he warns of the inflationary risks in the efforts around the world to shore up the sluggish global economy by easing monetary policies. He encouraged central bankers to be ready to start mopping up operations.
At home, property prices are resurging, propelled by the increase in liquidity. Policymakers have fought a two-year-long battle to deflate the property bubble without bringing down the whole house of cards. They will not readily throw that hard-won victory to the winds. With third-quarter GDP growth figures due on Thursday, we’ll get a sighting of how much of the headroom that falling inflation has provided, the central bank has a taste for.
Consumer prices rose by 5.4% in 2011, far ahead of the government’s target of 4%. But December’s monthly figure was down to 4.1% year-on-year, its slowest growth rate in 15 months, and well down from July’s 6.5% peak (via Xinhua). That suggests there is scope for China’s policy makers to continue priming the credit pumps, if cautiously. Next week’s GDP numbers are likely to show that growth has slowed to below 9% for the first time in ten quarters. Economists’ consensus is 8.7%; we think the number will come in a tad higher.
The conundrum for political leaders is food prices. They increased by 9.1% in December. Food prices are the component of the consumer price index least amenable to control by monetary policy while also being the most politically sensitive. Rising living costs are a ready cause of public dissatisfaction. Hitting the official inflation target is starting to look increasingly meaningless to Chinese consumers who don’t see the numbers aligning with what is left in their pockets.
The inflation rate was little changed in April, with consumer prices 5.3% higher than a year earlier, and down only 0.1% from March’s level, half as much as economists had forecast. That will disappoint policy makers who were expecting a greater response to their efforts to drive down prices. Food prices in particular confounded them, rising 11.5% year-on-year. Against that producer price inflation dropped to a 6.8% rate from March’s 7.3% as the growth rate in industrial output slowed. Also, new bank lending in April, at 39.6 billion, was down 2.7% from a year earlier as central bank tightening began to take hold. The persistence of price pressures and the only slight overall cooling of the economy suggest that the regime of step interest rate rises and capital reserve ratio hikes will continue alongside administrative measures to drive down the politically sensitive price of food.
Consumer price inflation hit 5.1% year-on-year in November, the fastest growth in 28th months and well up, as expected, from October’s 4.4%. The expected interest-rate hikes haven’t been announced yet, though we still expect to see them before the end of the year. There may have to be some managing of the yuan’s exchange rate first to cool capital inflows (and that may be more political than technical managing).
Fighting inflation and mopping up the excess liquidity that is fueling it are the priorities for 2011 agreed at the annual top-level economic meeting that has been going on over the weekend, Xinhua reports, though that was true before the meeting, too. What is also true is that the longer clamping down on inflation is left, the harder it gets to do.
The National Development and Reform Commission said on Sunday that consumer price inflation will probably fall below 5% in December as the price controls announced in late November take effect. Another truth is that supressing inflation is not the same as reducing its underlying causes.