Food price rise pushes up China inflation

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China's annual consumer inflation rate quickened to a seven-month high of 2.5pc in December on rising food prices, ahead of expectations and narrowing the scope for the central bank to boost the economy by easing monetary policy.

Accelerating inflation adds to signs that the world's second largest economy is finally snapping out of its worst downturn in three years, in a gradual recovery led by strengthening domestic demand.

Analysts say price pressures will quicken in coming months, due to low year-ago comparison figures, but that the inflation outlook remains benign overall, leaving the economy in a sweet spot for now that calls for no change in interest rates.

Were growth to swoon in Europe and the United States, China's two biggest export markets, Beijing could ease policy by reducing the level of deposits lenders leave with the central bank, economists say.

"There is little pressure from inflation to move on monetary policy," said Alistair Thornton, an economist at IHS (NYSE: IHS - news) in Beijing. "There is room, nonetheless, for a reserve requirement ratio (RRR) cut over the next few months, given potential tightness in the banking system."

For 2012 as a whole, China's consumer inflation accelerated 2.6pc, comfortably below the central bank's 4pc target.

Wary of stoking inflation and stubbornly-high house prices, China has abstained from further interest rate cuts after lowering borrowing costs twice between June and July last year.

It has also refrained from lowering the level of cash deposits it requires lenders to hold as reserves since May 2012, when it reduced the ratio by 50 basis points to 20pc for China's biggest banks.

Beijing's reluctance to cut rates after July 2012 contravened widespread market calls for easier policy. Instead, it preferred to loosen policy by adding cash through open market operations, a measure analysts say is more flexible.

If China's steep home prices should take off again in coming months, defying Beijing's three-year campaign to cool the buoyant property market, some analysts predict the People's Bank of China (PBoC) may even raise rates in the fourth quarter.

Home prices are not reflected in China's CPI (Other OTC: CPIC - news) , which only accounts for residential costs by tracking prices for rents and utilities and the cost of renovating and building homes.

Friday's data showed residential costs rose 3pc in December from a year ago, the biggest climb since October 2011 and the second-biggest contributor to inflation for the month after food.

The National Bureau of Statistics, which released Friday's data, said the food inflation, estimated to account for around 30pc of China's CPI, ran at 4.2pc year-on-year in December. The non-food component ran at 1.7pc.

Yu Qiumei, a senior statistician at the National Bureau of Statistics which released Friday's data, said vegetable prices were the key driver of December's inflation jump.

China is experiencing its coldest winter in 28 years and the chilly weather has affected the production and transportation of vegetables, Yu said.

Vegetable prices jumped 17.5pc in December from November (Xetra: A0Z24E - news) . Of the 0.8pc month-on-month gain in CPI - the sharpest in 11 months - nearly 60pc came from rising vegetable prices, Yu said.

Data on Thursday showed China's export growth rebounding surprisingly sharply to a seven-month high in December in a strong finish to the year after seven straight quarters of slowdown, even though subdued foreign demand means the revival may not be sustained.

Still, in a sign things may be looking up for China's corporate sector, which has been battling falling profits, Friday's data pointed to easing producer deflation.

The producer price index fell 1.9pc in December from a year ago in the 10th consecutive month of decline, but improving from November's 2.2pc annual fall. Economists had forecast a 1.8pc decline.

"We expect the central bank to keep interest rates on hold, and focus on liquidity management via open market operations, with two to three more RRR cuts throughout 2013," said Zhu Haibin, an economist at JPMorgan.