Tag Archives: producer price inflation

Inflation Fall Confirms Scope For Rate Cuts

The economic indicators we are expecting to provide the context for this week’s surprise quarter percentage point cut in interest rates by the People’s Bank of China are starting to come in. Among the first to arrive is consumer price inflation. At 3% for May, it is at its slowest monthly growth rate in two years, and down from April’s 3.4%, resuming the decline from last July’s 6.5% peak. The producer price index fell to 1.4% in May, confirming the global weakening of demand.

Both falls provide the headroom to cut rates without rekindling inflationary expectations. The cut in retail gasoline prices also announced this week was insurance. At least one more round of cuts to the banks’ reserve ratios followed by another modest interest rate cut seems likely for later this year.

Update: Industrial output in May ticked up by 0.3% from April’s 9.3% growth rate while fixed-asset investment, up 20.1% year-on-year, showed its third consecutive month of slowing growth and retail sales grew by 13.8%, down from April’s 14.1%. In short, plenty of evidence to support the shift of policy from reducing inflation to promoting growth. Zhuang Jian, an economist with the Asia Development Bank, summed up policymakers’ dilemma when he told state media:

Relying on investment to pull growth will have an immediate effect, but it will have negative repurcussions if not used rightly, while the consumption driver, though carries long-term value, is slow to boost economy.

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February’s Dismal Numbers

The newly released economic statistics don’t make for cheerful reading in Beijing. Consumer price inflation in February was 4.9% year-on-year, unchanged from January’s rate and with food prices up 11% in February compared to 10.3% in January. The New Year holiday will have pushed food prices up somewhat but the increase along with February’s producer price index being up 7.2% suggests inflationary pressure won’t be abating soon.

Neither is the sharp increase in residential real estate investment in January and February reassuring, up 35% from the same period a year earlier, and above the 33% growth for 2010.  Overall fixed-asset investment growth was up 24.9% year-on-year for the two months, compared to 23.8% for 2010. Central government investment was up 6.3% but local governments’ remains strong, up 26.9%. Beijing won’t be happy about that as it suggests the government is struggling to rein in the economy and make headway in its intention to rebalance the economy away from investment.

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