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Consumer inflation eases in October

By Wang Xu (China Daily)
Updated: 2008-11-12 07:49

Customers pick out vegetables in a supermarket in Yichang, Hubei province on October 12, 2008. Consumer price inflation eased to an 18-month low in October, giving room for the government to introduce further interest rate cuts to boost the economy. [China Daily]

Consumer price inflation eased to an 18-month low in October, giving room for the government to introduce further interest rate cuts to boost the economy.

The consumer price index rose 4 percent year-on-year in the past month, declining for the sixth consecutive month, according to the National Bureau of Statistics.

"Consumer prices are now on the downward track," said Chen Jianqi, an economist with Bank of Communications. "Price growth may turn negative in January and we may even have to deal with deflation."

Falling food prices are the main factor contributing to the moderation of consumer inflation, after it peaked at 8.6 percent in February. Food prices, which account for one-third of the CPI basket, fell 0.9 percent from a month ago.

Analysts say the grain harvest and weakening demand for commodities will also help keep inflation low.

The producer price index, the gauge for factory-gate inflation, fell for the eighth consecutive month to 6.6 percent in October. The figure is considered a leading indicator for consumer inflation as it usually takes six months for manufacturers to pass on cost pressures to consumers.

"The declining prices offer the government a great opportunity to adjust the price mechanism for resource products and relax price control," said Chen.

Analysts say the weakening inflation means the government can focus on maintaining economic growth, even as it grapples with the increased risks of an excessive slowdown.

"The falling inflation gives policymakers a free hand to support growth," said Ken Peng, an economist with Citigroup. "The fiscal package announced over the weekend may patch growth in the next two years, but monetary policy easing would still be necessary to complement the fiscal expansion."

Over the weekend, the central government unveiled a 4-trillion-yuan package to bolster economic growth, which fell to 9 percent in the third quarter, the lowest in five years. With world economic growth poised to slow further in 2009, a rebound in export growth now looks unlikely as most domestic consumers and businesses have decided to cut spending.

On Friday, the International Monetary Fund (IMF) reduced its 2009 forecast for global economic growth to 2.2 percent, down 0.8 percentage points from its October projections.

The government also said it will change its stance on monetary policy toward moderately easy from tight.

Before the announcement, the central bank had already lowered interest rates three times in six weeks. It also did away with loan quotas for local banks to encourage further lending to spur the economy.

China may cut interest rates further to maintain its economic growth and domestic demand, said Zhou Xiaochuan, governor of the central bank, at the G20 finance officials meeting held in Sao Paulo in Nov 9.