China Inflation Eases Amid Weak Economy

Residents purchase vegetables at a market in Zhengzhou, capital of central China's Henan Province, on June 8, 2015.


China’s consumer inflation eased while factory prices sank in May under pressure from a slowing economy, renewing concerns about deflationary pressure in the world’s No. 2 economy.

Analysts said the modest pressure on prices meant that authorities could continue efforts to bring down borrowing costs for the nation’s corporate sector amid weak domestic and global demand.

China’s consumer-price index rose 1.2% in May from a year earlier, slower than the 1.5% year-over-year rise in April, the National Bureau of Statistics said Tuesday. The inflation rate was slightly weaker than market expectations and well within Beijing’s target of keeping consumer inflation below 3% this year.

The producer-price index, which measures prices of goods at the factory gate, dropped 4.6% in May from a year earlier, matching a 4.6% year-over-year fall in April but slightly worse than market expectations.

Factory-level prices have now been declining for 39 consecutive months since March 2012 as weak demand leaves excess capacity in key industries like steel and cement and drives prices lower.

“The data are weaker than expected and clearly point to increasing downward pressure on economic growth and rising risks from deflation,” said Jianguang Shen, economist at Mizuho Securities. “This also provides more evidence of the need for further monetary policy easing.”

China’s economy grew 7% year over year in the first quarter, its worst performance in six years. Beijing has stepped up infrastructure spending, offered more tax breaks and reduced red tape to lift economic growth.

The central bank has cut interest rates three times since November to spur domestic demand and trim borrowing costs. It has tried to make it easier for banks to lend more of their deposits by reducing the amount they need to hold in reserve. It has used targeted lending aimed at areas of the economy in need of special help, such as farmers, small businesses and low-cost housing construction.

Some economists see the central bank calling a halt to its interest-rate-cutting efforts in the coming months. Haibin Zhu, economist at J.P. Morgan, said that if other economic data for May are weaker than expected there could be one more rate cut in the next few months. But he added that the economy appears to be stabilizing—if not yet improving—as a result of previous government support measures, and future data should bear that out.

“We believe we are near the end of the rate-cutting cycle,” said Mr. Zhu.

Moreover, many economists expect the U.S. Federal Reserve to begin raising interest rates in September as the U.S. economy regains its footing. That could limit the Chinese central bank’s willingness to lower interest rates as expectations of higher U.S. rates could lead to more capital outflows as investors look for better returns in U.S. dollar assets.

Much of the easing in the consumer-price index in May was linked to milder increases in food prices, which were up 1.6% on year in May, below the 2.7% rise in April. Comparisons with relatively faster inflation a year ago also made this year’s data look worse.

The consumer-price index was down 0.2% in May compared with April, the third consecutive on-month decline. The producer-price index was down 0.1% on month in May, moderating from a 0.3% on-month drop in April.




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