China's Consumer Prices Rise at Slowest Pace in Two Years - Bloomberg

By Bloomberg News - 2012-06-09T01:40:14Z

China’s consumer prices rose the least in two years in May and producer prices fell more than expected, evidence of moderating domestic demand and supporting the government’s decision this week to cut interest rates for the first time since 2008.

The inflation rate fell to 3 percent from a year earlier, the National Bureau of Statistics said today. That compares with 3.4 percent in April and the 3.2 percent median estimate in a Bloomberg News survey of 30 economists. Premier Wen Jiabao said in March he wants to keep price gains within 4 percent this year.

Easing inflationary pressure has given policy makers more leeway to cut interest rates as Europe’s debt crisis and slowing domestic demand threaten to push growth below the government’s target this quarter. Data later today may show industrial output expanded at close to the slowest pace in almost three years and the customs bureau may say tomorrow that exports rose less than the annual target for a third month.

“The slowdown in inflation was an important reason behind the decision to cut interest rates,” Ma Xiaoping, a Beijing- based economist with HSBC Holdings Plc said before the announcement. “The trend is clear: inflation will keep slowing, which will allow the central bank to loosen monetary policy further.”

The People’s Bank of China will probably cut interest rates again if the economy doesn’t show “clear signs of improvement” in the second quarter, Ma said. Banks’ reserve-requirement ratios, which have already been reduced three times since November, may be lowered another four times this year, she said.

Steepest Slowdown

Monetary-policy makers from around the world are being pressed into action to shore up a global economy suffering its steepest slowdown since the recession ended in 2009.

Australia and Brazil lowered interest rates over the past two weeks while the European Central Bank left the door open at a June 6 press conference for a cut in borrowing costs. Federal Reserve Chairman Ben S. Bernanke told a Congressional committee this week that policy makers will discuss later this month whether to do more to spur growth.

India cut its benchmark interest rate in April for the first time since 2009 and may lower borrowing costs again when it meets on June 18, according to Dariusz Kowalczyk, a strategist at Credit Agricole CIB in Hong Kong.

Crude Declines

Inflation in China has eased from a three-year high of 6.5 percent in July 2011, aided by government efforts to cool property prices, boost pork and vegetable supplies and cut transport costs.

Falling global commodity costs have helped. China yesterday announced a 5.5 percent cut in retail gasoline prices after global crude costs slumped. The move follows a reduction last month that was the first since October.

The cost of food, which accounts for a third of China’s CPI basket, increased 6.4 percent in May from a year earlier, down from a 7 percent gain in April. Pork prices, which drove consumer-price gains last year, fell 0.6 percent from a year earlier as supplies improved.

China’s producer-price index fell 1.4 percent in May from a year earlier, the statistics bureau said today. That’s the third straight drop and the longest stretch of declines since 2009. The median estimate in a Bloomberg survey was for a 1.1 percent decline.

Anhui Conch Cement Co. (914), the nation’s biggest cement producer, warned this week its first-half profit probably fell more than 50 percent as prices of its products “dropped significantly” due to slower growth in fixed-asset investment.

Growth Target

China’s economy expanded 8.1 percent in the first three months from a year earlier, the fifth quarterly deceleration and the slowest pace in almost three years. Growth may slide to 7 percent or “slightly below” this quarter, Credit Suisse Group AG estimated last month, while Citigroup Inc. forecasts a 7.5 percent pace.

Wen in March set a 2012 growth target of 7.5 percent, down from an 8 percent goal in place since 2005, as the government focuses on encouraging consumption and curbing the nation’s reliance on investment and exports.

The statistics bureau will release industrial output, retail sales and fixed-asset investment data later today. Production may have increased 9.8 percent in May from a year earlier and retail sales growth was probably little changed at 14.2 percent, Bloomberg surveys showed. Fixed-asset investment excluding rural households may have grown 20.0 percent in the first five months of this year, down from 20.2 percent in the first four months.

--Zhou Xin. With assistance from Ailing Tan in Singapore, Cynthia Li in Hong Kong, Penny Peng and Chua Baizhen in Beijing. Editors: Nerys Avery, James Mayger

To contact the reporter on this story: Zhou Xin in Beijing at xzhou68@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net