China inflation slows in March

City A.M. Reporter

CHINA’S s annual consumer inflation cooled in March as food prices eased from nine-month highs and producer price deflation deepened, according to data published today, leaving policymakers room to keep monetary conditions easy and nurture a nascent recovery.

The consumer price index showed an annual rise of 2.1 per cent, The National Bureau of Statistics in Beijing said, well below the 2.4 percent market consensus from a Reuters poll of economists.

The March inflation data reflected the tepid pace of the economic recovery that began late last year and is likely to reduce fears that monetary conditions could be tightened at an early stage in the recovery cycle.

While producer prices dropped 1.9 per cent year-on-year, a steeper fall than February’s 1.6 per cent, which was expected as the consensus forecast was for a fall of 1.8 per cent.

“Lower inflation will greatly ease investors’ concerns that the policymakers would begin to tighten monetary conditions," Haibin Zhu, chief China economist at JP Morgan in Hong Kong, said.

The CSI300 index of top Chinese shares listed in Shanghai and Shenzhen climbed following the data, while the China-sensitive Australian and New Zealand dollars also received a boost. China is major buyer of Australian and New Zealand exports.

Month-on-month consumer prices fell 0.9 per cent versus the market consensus of a 0.6 per cent drop, indicating restrained consumption triggered by a government-led internal austerity drive launched at the end of 2012 in a bid to cut down excessive banqueting and gift-giving that is often linked to corruption.

Much of the drop in the headline CPI was explained by softer food prices which economists say are normalising after February's Lunar New Year seasonal spike, rather than reflecting any major impact from a bird flu outbreak and a pork scare after thousands of dead pigs were dumped in a Shanghai river in March.

Pork prices did fall at their fastest annual rate in three months in March, but the 5.5 per cent drop was a half to a third of the rate of decline seen through most of the last six months of 2012 and driven more by the supply and demand dynamics in the pork production cycle that is dominated by small scale farmers.

Ting Lu, chief China economist at Bank of AmericaMerrill Lynch in Hong Kong, said that while food scares could cause inflation volatility in the near term, the long term impact of rising wages on food prices was more important.

"Rising food prices are unavoidable in the future as Chinese farmers' relative wages are further increased, so both the markets and policymakers should increase their inflation tolerance level to around three per cent to four per cent," Lu wrote in a note to clients.