China inflation signals demand falling as prices ease

Sun Jul 8, 2012 11:43pm EDT
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By Langi Chiang and Kevin Yao

BEIJING (Reuters) - China's consumer and producer prices eased more than expected in June, inflation data on Monday showed, signaling falling demand for goods from the world's second-biggest economy and the likelihood of more growth-supporting policy moves from Beijing.

China's annual consumer inflation cooled to a 29-month low of 2.2 percent in June versus May's 3.0 percent, data from the National Bureau of Statistics showed, with a month-on-month CPI fall of 0.6 percent twice the rate of decline expected.

Producer prices eased even faster, falling 0.7 percent on the month and 2.1 percent on the year, marking the fourth straight month of outright deflation in factory gate prices and pushing the PPI to a 31-month trough.

"The PPI figure last month further confirmed the economy continued to cool down, which means the industrial output and other economic activity data could not be upbeat," said Wang Jin, a Shanghai-based analyst with Guotai Junan Securities.

China last suffered a bout of deflation between February and October of 2009. By the end of 2009, consumer prices had fallen 0.7 percent on the year.

During that episode annual GDP growth sank to an 8-year low of 6.6 percent in the first three months of 2009 as deflation began to get a grip, with the economy overall seeing its slowest full year of growth since 2002 - albeit at a 9.2 percent clip.

"Inflation is no longer an imminent threat to China. We expect July CPI to fall below 2 percent. August and September will be important months to monitor from an inflation perspective," Dongming Xie, an economist at OCBC Bank in Singapore, said.

"If prices fall too fast, fuelling deflationary expectations, China is likely to cut interest rates further."   Continued...

A visitor walks in front of the Wynn Macau resort in Macau June 5, 2012. REUTERS/Bobby Yip