China's Feb data add to deflation worries

10 March 2015

Chinese inflation was up unexpectedly in February, though producer prices continued to fall, highlighting the heavy pressure on profit margins at Chinese companies.

Commentators say policy makers would, as a result, need redouble efforts to find new ways for supporting growth.

The producer price index (PPI) declined 4.8 per cent in February, the National Bureau of Statistics said today, the most negative reading posted since Oct 2009, which stretched a long-running factory deflation cycle set in in 2012 to nearly three years.

Meanwhile, economists and policymakers remain concerned that the risk of deflation was increasing for the second-largest economy in the world as the downturn in the property market and widespread factory overcapacity is compounded by an uncertain global outlook and soft commodity prices.

China's statistics bureau attributed the 1.4-per cent increase in consumer prices to higher costs for vegetables and fruit, even as the decline in PPI - which analysts had expected to come in at minus 4.3 per cent - was blamed declining prices for global commodities, particularly energy, that had hurt profitability at China's industrial giants.

"February's seasonal pick-up in food inflation will likely prove short-lived and we still expect inflation to fall back below 1 percent in coming months," wrote Julian Evans-Pritchard of Capital Economics in Singapore. "Nonetheless, today's inflation data suggest that downward pressure on broader prices has begun to ease."

Meanwhile, the central bank cut interest rates for the second time in just three months at the start of March, citing ''historically low inflation'' and the need to keep real interest rates low to bolster slumping growth.

China registered an economic growth of 7.4 per cent last year, which was the slowest in about a quarter of a century, and growth was expected to slide further this year.

Beijing set an annual gross domestic product growth target of about 7 per cent last week for 2015, down from 7.5 per cent last year. The IMF projects growth of 6.8 per cent this year.

Deflationary pressures in China had been accentuated by the steep fall in global oil prices as also due to the slump in the prices of commodities such as iron ore, copper and aluminium slumping, largely due to the slowdown in the country's economy.

The rebound in consumer prices in February notwithstanding, the inflation rate was still less than half of the government's target of ''around 3 per cent'' for the year.

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