Dec 11, 2014

    China's Nov inflation falls to five-year low of 1.4%


    CHINA'S consumer inflation fell to a five-year low of 1.4 per cent last month, the government said yesterday, fuelling concern about the danger of deflation in the world's second-largest economy.

    The news comes after the central People's Bank of China shocked markets on Nov 21 by cutting interest rates for the first time in more than two years to kickstart the slowing economy. Analysts said they expect further easing measures in the new year.

    The rise in the consumer price index (CPI) is the lowest since November 2009, coming in short of a median forecast of 1.6 per cent in a Wall Street Journal survey of 16 economists, and marking a slowdown from October's 1.6 per cent.

    The National Bureau of Statistics also said that the producer price index (PPI) - a measure of costs for goods at the factory gate and a leading indicator of the trend for CPI - fell 2.7 per cent year-on-year, the worst reading since a similar decline in June last year.

    The last PPI increase was in January 2012.

    The figures point to further downward pressure on economic activity in China, a key driver of global growth, after trade figures on Monday showed imports unexpectedly fell, and exports grew far slower than forecast.

    The country has also been hit by disappointing manufacturing activity, tumbling property prices and nagging concerns over corporate and local government debt.

    "China has entered a rapid disinflation process, and faces the risk of deflation as commodity prices continue to trend lower, and growth is expected to slow further in the coming year," Australia and New Zealand Banking Group economists Liu Li-Gang and Zhou Hao wrote in reaction to yesterday's data.

    While moderate inflation encourages consumers to buy before prices go up, falling prices lead shoppers to delay purchases and companies to put off investment, both of which can hurt growth.

    Once deflation starts, it can be hard to overcome as Japan has found after years of policy experiments aimed at ending it.

    Yesterday's figures were far below the government's inflation target of 3.5 per cent this year.

    Nomura economists said in a note: "We expect inflation to remain below 2.0 per cent next year, which may raise concerns of deflation and trigger more policy easing."

    Economists have been expecting further measures after last month's rate cuts, including reductions in reserve requirements - the amount of cash banks must keep on hand. Cutting the level means more money is available for lending, which can stimulate the economy.

    But Julian Evans-Pritchard, China economist at Capital Economics, said that while price rises should ease further heading into the new year, worries about deflation risks were overblown, despite the worsening producer prices figure.

    "Industrial input costs are falling on the back of lower commodity prices, but the factory gate price of final consumption goods has remained broadly flat, and so many firms are actually better off," he wrote.

    Gross domestic product growth (GDP) came in at 7.3 per cent in the third quarter, the slowest since the height of the global financial crisis in early 2009.

    China had set its GDP target at about 7.5 per cent for this year and analysts are broadly expecting it to be reduced to as low as 7.0 per cent for next year as the authorities try to transform the economy to make consumer spending the key growth driver.