China August inflation goes up to two per cent

BEIJING—China’s annual rate of consumer inflation ticked up to two per cent in August from July’s 30-month low of 1.8 per cent, official data showed on yesterday, suggesting that room to ease monetary policy to shore up growth may be narrowing. Economists polled by Reuters had forecast inflation to pick up to 2.0 per cent in August.

Month on month, however, inflation was a touch ahead of forecasts, up 0.6 per cent in August versus July. Analysts had anticipated a rise of 0.5 per cent. Food inflation was up 3.4 per cent on a year ago while non-food prices rose 1.4 per cent. “Inflation is coming back quickly. Together with rising home prices, it will limit the scope for further policy relaxation,” said Dong Xian’an, economist with Peking First Advisory.

Separately, the National Bureau of Statistics said China’s producer price index dropped 3.5 per cent in August from a year earlier, which compared to forecasts for a 3.3 per cent decline. It marked the sixth straight month of producer price deflation, putting a further squeeze on corporate profits already dampened by a drop-off in demand at home and abroad courtesy of global economic headwinds stemming from Europe’s sovereign debt crisis.

Investors widely expect the central bank to ease monetary conditions further as part of the government’s campaign of “policy fine-tuning” unveiled in the autumn of 2011. The People’s Bank of China has cut interest rates twice since June and trimmed banks’ required reserve ratios (RRR) in three 50 basis point steps since last November that has freed an estimated US$190 billion for new lending.

But a seeming recent preference for using money market operations over interest rates to boost liquidity conditions in the economy is seen as a sign of the policy dilemma facing a central bank and a government super hawkish on inflation and wary of aggressive rate cuts.

Reuters