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China Inflation Jumps but Worries Endure

They expect the PBoC to further cut the reserve requirement ratio (RRR) -- the amount of cash banks must keep on hand -- \'lowering the funding costs for the real economy\'.

Published: 10th March 2015 11:54 AM  |   Last Updated: 10th March 2015 11:54 AM   |  A+A-

By PTI

BEIJING:  China's consumer inflation rebounded in February from a more-than-five-year low, official data showed today, but a plunge in factory gate prices added to persistent concerns about deflation in the world's second- largest economy.

The 1.4 per cent increase in the consumer price index (CPI) compared with a gain of 0.8 per cent in January, according to National Bureau of Statistics (NBS) figures.

The result, which exceeded the median forecast for a 1.0 per cent gain in a survey of analysts by Bloomberg News, came largely due to higher prices for food and services surrounding China's annual Lunar New year holiday, which economists largely saw as a one-off.

In contrast the producer price index (PPI) -- a measure of costs for goods at the factory gate and a leading indicator of the trend for CPI -- declined for the 36th straight month in February.

The PPI fell 4.8 per cent year-on-year, the NBS said, more than the 4.3 per cent decline recorded in January and the worst result since October 2009.

Moderate inflation can be a boon to consumption as it encourages consumers to buy before prices go up, while falling prices encourage shoppers to delay purchases and companies to put off investment, both of which can hurt growth.

"We continue to expect inflation to remain relatively low and still see disinflationary pressures in the economy," Nomura economists said in an analysis of the February data.

"To offset headwinds to economic growth, we expect monetary policy to be loosened further," they added.

Economists are increasingly worried that China -- a key driver of global growth -- is heading for a debilitating deflationary spiral, such as that which has plagued Japan for years, citing consistently weak CPI figures as well as accelerating falls in factory prices.

The central People's Bank of China cut benchmark deposit and lending interest rates in February for the second time in three months, citing "historically low inflation", as the economy expands at its slowest annual pace in nearly a quarter of a century.

"The weak inflation profile suggests that further monetary policy easing will be needed to fight against rising deflation risk," ANZ economists Liu Li-Gang and Zhou Hao said in a report, adding that despite the rate cuts "the easing effort so far has been limited."

They expect the PBoC to further cut the reserve requirement ratio (RRR) -- the amount of cash banks must keep on hand -- "lowering the funding costs for the real economy".

Cutting the RRR theoretically frees up more cash for lending.

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