Date
25 March 2017
Consumer inflation quickened to 2.5 percent in January from a year earlier, the highest since May 2014. Photo: Bloomberg
Consumer inflation quickened to 2.5 percent in January from a year earlier, the highest since May 2014. Photo: Bloomberg

China inflation picks up, central bank eyes tighter policy

China’s producer price inflation picked up more than expected in January to near six-year highs as prices of steel and other raw materials extended their rally.

Consumer inflation in the country also rose more than expected, nearing a three-year high as fuel and food prices jumped, Reuters reports, citing official data.

Much of the pick up in consumer prices was likely due to higher food and travel costs heading into the Lunar New Year holiday, the National Bureau of Statistics said.

But mounting price pressures in China and many other countries have sparked talk of tighter monetary policy this year, after years of super-loose settings aimed at reviving economic growth.

China’s central bank raised short-term interest rates in recent weeks as it looks to contain risks from an explosive growth in debt, while India’s central bank last week unexpectedly signaled an end to its longest easing cycle since the global financial crisis, citing inflation risks.

Some analysts, however, believe the ramp up in price pressures in China may be short-lived, noting that a jump in January food prices was likely seasonal and that producer price gains slowed by half on a month-on-month basis.

“We don’t expect such high rates of inflation to last,” Capital Economics China economist Julian Evans-Pritchard said in a note.

“Tighter monetary policy, slowing income growth and cooling property prices should keep broader price pressure contained over the medium-term,” he added, noting that weak prices early last year may have exaggerated the strength of a reflationary trend seen in recent months.

Consumer inflation quickened to 2.5 percent in January from a year earlier, the highest since May 2014.

But it is still well within the government’s comfort zone of 3 percent, and is showing few signs yet that the jump in producer prices is filtering through to the broader economy, analysts say.

Analysts polled by Reuters had predicted the consumer price index (CPI) would rise 2.4 percent, after a 2.1 percent gain in December.

Food prices, the biggest component of CPI, rose 2.7 percent in January, led by a 7.1 percent increase in the price of pork.

Fuel costs surged 16.5 percent on-year, the biggest increase among CPI components, likely due to a low comparison in the year-ago period when fuel prices fell.

Capital Economics expects consumer prices to rise only 2.0 percent this year.

Producer price inflation accelerated to 6.9 percent – the fastest since August 2011 – from December’s rise of 5.5 percent.

Gains in the producer price index (PPI) were driven by a 31.0 percent increase in mining costs as coal prices rise, the biggest jump in that category since early 2010.

The market had expected producer prices to rise 6.3 percent on an annual basis.

But on a monthly basis, they only rose 0.8 percent, down from December’s 1.6 percent gain.

China’s massive imports of coal, crude oil, iron ore and industrial materials have helped fuel a sharp rebound in global resources prices in recent months, boosting profits for producers and processors.

Worries about speculation and debt risks led the central bank to move to a tightening bias in recent months, not inflation, analysts say.

“Inflation is not the main driver of monetary policy at the moment … I do think they are going to tighten more this year, but the main driver is credit risk and concerns of leverage and what’s going on in the property market,” said Capital Economics’ Evans-Pritchard.

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CG

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