Deflation worries ease for China firms

Producer prices fall at slowest pace since Nov 2014; consumer inflation cooler than forecast

BEIJING • Deflationary pressures in China eased further last month, relieving some pressure on cash- strapped companies, but consumer inflation was cooler than expected, suggesting that the central bank will keep policy supportive in the coming months but be in no hurry to cut interest rates further.

Consumer inflation rose less than forecast as pressure from high food prices eased, while producer prices recovered more than forecast, the statistics bureau said yesterday.

The consumer price index (CPI) rose 2 per cent year-on-year last month, compared with a 2.3 per cent increase in April. Food prices were up 5.9 per cent year-on-year in May after rising 7.4 per cent in April.

Non-food prices rose 1.1 per cent, flat from April, and continued to show a lack of price pressures that would indicate activity in the broader economy was gaining steam.

"On a month-on-month basis, China's CPI has been dropping for three consecutive months, clearly pointing to an easing bias in monetary policy for the time being," said Mr Zhou Hao, senior Asia emerging market economist at Commerzbank. Improvements in producer prices will not change China's overall soft inflation outlook, he added.

In a sign that strains on Chinese companies are easing, producer prices fell at their slowest rate since November 2014, supported by a government investment spree and higher commodity prices.

The producer price index (PPI) fell 2.8 per cent last month, up from a 3.4 per cent drop in April. On a monthly basis, producer prices rose 0.5 per cent, the third increase in a row.

China's consumer inflation rate remains well below the official 3 per cent target, and despite strengthening producer prices, analysts do not see inflation at these levels impacting policy decisions.

"At these levels, inflation dynamics are not an important factor in this year's monetary policy decisions," said Mr Zhu Haibin, chief China economist at JPMorgan. May and June economic data will continue to show a recovery, but expected growth will slow again in the second half, which should lead to further support from the government.

Many economists have scaled back expectations of further cuts in interest rates and bank reserve ratios this year as the People's Bank of China has shown a preference for more targeted cash injections to help badly stressed sectors such as farming and small companies.

The government also seems to be putting a greater emphasis on fiscal spending to support growth, amid worries of the dangers of relying on too much debt-fuelled stimulus.

Data released on Wednesday showed China's exports weakened last month, but imports were stronger than expected, pointing to improving domestic demand and adding to hopes that the world's second-largest economy may be slowly stabilising.

REUTERS

A version of this article appeared in the print edition of The Straits Times on June 10, 2016, with the headline 'Deflation worries ease for China firms'. Print Edition | Subscribe