China inflation picks up, limits room for policy easing

Tue Jul 9, 2013 1:08am EDT
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By Kevin Yao and Xiaoyi Shao

BEIJING (Reuters) - China's annual consumer inflation accelerated more than expected in June but factory-gate deflation persisted for a 16th month, underscoring the policy dilemma facing the People's Bank of China as it worries about long-term price risks even as economic growth slows.

The central bank is seen keeping policy largely neutral in the near term to balance the need to keep the world's second-largest economy on an even keel while warding off inflation as well as possible property bubbles, analysts say.

"We believe the headline inflation data will not change monetary policy stance. We don't think the central bank will increase or cut interest rates within this year," said Li Wei, an economist for Standard Chartered Bank in Shanghai.

The National Bureau of Statistics said that annual consumer inflation quickened to 2.7 percent in June from May's 2.1 percent, partly because of the base effect.

The headline inflation number is still below the government's target of 3.5 percent and also below the benchmark one-year deposit rate of 3 percent.

Food prices jumped 4.9 percent in June from a year earlier, quickening from the 3.2 percent rise in May. Pork prices rose 1.1 percent year-on-year versus a fall of 4.9 percent in May.

Although inflation may stay benign in the coming months in the absence of an economic recovery, the central bank is worried about long-term inflationary risks, which could complicate policy, especially as property prices keep climbing.

The data "reduces the likelihood of interest rate cuts this year and that is not a good policy background to have," said Kevin Lai, an economist at Daiwa in Hong Kong.   Continued...

A customer looks at vegetables under price tags at a supermarket in Hangzhou, Zhejiang province July 9, 2013. REUTERS/Stringer