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China’s inflation falls, giving room for stimulus

First Published Aug 08 2012 08:57 pm • Last Updated Aug 08 2012 10:24 pm

Beijing • China’s inflation fell further in July, giving the government more room to stimulate weak growth amid mixed signals about whether the world’s second-largest economy is recovering from a painful slowdown.

Politically sensitive consumer prices rose 1.8 percent, down from the previous month’s 2.2 percent and well below last year’s highs, data showed Thursday. That was driven by a 2.4 percent rise in food costs.

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Lower inflation gives Beijing more room to cut interest rates or take other steps to shore up economic growth that has slowed sharply this year without the risk of igniting a new price spike.

"The numbers confirm that the door for more monetary easing is open," said Credit Agricole economist Dariusz Kowalczyk in a report.

Beijing tightened economic controls in 2010-11 to cool overheating and surging inflation that peaked at 6.5 percent in July 2011. Chinese leaders reversed course late last year and eased some controls after global demand for Chinese goods plunged, causing the economy to slow abruptly.

Growth fell to a three-year low of 7.6 percent in the three months ending in June. Analysts say the slump probably has bottomed out and a recovery should begin in the second half. But Premier Wen Jiabao warned last month the economy still faces "relatively large" pressure to slow further.

The slowdown has raised the threat of job losses and possible unrest as the ruling Communist Party tries to enforce calm ahead of a once-a-decade handover of power to younger leaders.

Surveys released earlier showed Chinese manufacturing barely grew in July as global and domestic consumer demand weakened. That prompted analysts to say Beijing need to take more steps to revive growth.

The International Monetary Fund cut this year’s growth forecast for China in mid-July to a still-robust 8 percent, down from its previous outlook of 8.2 percent. It warned a "hard landing," or abrupt downturn in growth, was still possible.

Beijing has responded to the slowdown by cutting interest rates twice since the start of June and pumping money into the economy through high spending on building low-cost housing and other public works.

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Authorities are moving more cautiously than they did in response to the 2008 global crisis after Beijing’s huge stimulus then triggered an inflation spike and a wasteful building boom.

Producer prices fell by 2.9 percent in July, government data showed, reflecting weak demand and lower commodity costs.

The steady decline in inflation has prompted warnings China might be entering a period of deflation, a potentially dangerous phenomenon. It can hurt the economy by prompting consumers to put off purchases in expectation of lower prices, causing a downward spiral of lower company revenues and wages.

Analyst say, however, the decline is due largely to a fall in commodity prices that should be temporary, and inflation should pick up later in the year as growth rebounds.

"The data reflects downward pressure on prices coming from weaker commodities," said Kowalczyk. "We expect CPI inflation to rise from now on, reaching 3.8 percent at year end."

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