China Consumer Prices Fall for First Time in 6 Years
CHINA, CENTRAL BANK, ECONOMY, INFLATION, INTEREST RATES, TRADE, EXPORT, IMPORT
Reuters
| 09 Mar 2009 | 11:49 PM ET
China dipped into deflation at the consumer level in February for the first time in more than six years, giving the central bank scope to cut interest rates further if it needs to boost the economy.
The consumer price index (CPI) fell 1.6 percent in the year to February, bang in line with forecasts, but both the government and a number of private economists played down the risk of a protracted period of falling prices.
The lurch lower in February was largely because of the high base of comparison: in the 12 months to February 2008, consumer prices were up 8.7 percent, near a 12-year peak, as the cost of food, oil and imported raw materials soared.
"Deflation, though a real concern, is expected to be a temporary phenomenon," said Jing Ulrich, chairman of China equities at J.P Morgan in Hong Kong.
"That being said, we believe that the government may take additional steps to avoid an extended period of deflation. Further interest rate cuts and required reserve ratio adjustments may be made, and additional measures to stimulate consumption could be introduced," she said in a note.
The year-on-year drop in the CPI was the first since December 2002.
But the National Bureau of Statistics said that, even if prices had been unchanged in February from the end of 2008, the statistical effect of last year's high inflation rate would have been to drive the CPI down 2.5 percent.
With China pursuing an active fiscal policy and a moderately loose monetary policy, it was wrong to jump to the conclusion that China had relapsed into deflation for the third time in a decade, the statistics office said.
Still, it drew attention to a sharp decline in prices of raw materials like crude oil, iron ore and metals due to the global economic slowdown.
This was the driving force behind an acceleration in the pace of decline in China's producer prices, also announced by the NBS on Tuesday, to 4.5 percent in the year to February from 3.3 percent in the 12 months to January.
The concern of some economists is that these deflationary pressures will intensify, despite China's 4 trillion yuan ($585 billion) stimulus plan, because the economy is saddled with excess production capacity at a time of depressed global demand.
More From CNBC.com