Benign inflation in China takes pressure off Chinese policymakers

BEIJING - Reuters

A vendor sleeps on packs of grapefruit at a market in Wuhan, Hubei province on Oct 15. China’s annual inflation dropped to 1.9 percent in September. REUTERS photo

Benign inflation in September showed China has scope to ease policy even as evidence mounts that earlier pro-growth measures are gaining traction, reducing the pressure on policymakers to act as a once-a-decade leadership transition approaches.

Signs that lending is finally perking up, the approaching end to the destocking cycle and stable employment could allow policymakers to argue that steps taken earlier this year to support the economy in the face of strong global headwinds have worked.

Subdued consumer prices, meanwhile, leave plenty of space for them to act to spur faster growth in the winter after a new generation of leaders takes over the ruling Communist Party.

China’s consumer price inflation eased to 1.9 percent in September from August’s 2.0 percent, while producer prices dropped 3.6 percent from a year earlier. Both numbers matched the forecast of economists polled by Reuters.

Inflation has fallen steadily from a three-year peak of 6.5 percent in July 2011 in response to a series of policy tightening steps and weakening economic activity.

Full-year inflation for 2012 should come in about 2.7 percent, well below the government’s 4 percent target, with economic growth around 7.8 percent, Yi Gang, deputy governor of the People’s Bank of China, said in a speech at last week’s annual meeting of the International Monetary Fund.

September marked the seventh straight month of producer price deflation, reflecting China’s cooling growth and weak demand for its exports. The deflation has hurt corporate profits and underpins expectations that consumer inflation will stay tame in the coming months.

Meanwhile, rising fuel prices boosted Indian inflation in September to 7.8 percent, its highest level since November, undermining the government case calling for a central bank interest rate cut this month to boost the sluggish economy.

The rise in the wholesale price index - India’s main inflation gauge - was more than expected.

Economists in a Reuters poll had expected an inflation reading of 7.7 percent, up from 7.55 in August.

The Reserve Bank of India says stubbornly high inflation prevents it from cutting its policy rate, on hold at 8 percent since April, even though economic growth is its weakest in three years. Inflation is well
above the central bank’s comfort level of 4-5 percent.

“Today’s inflation number significantly reduces the chance of a repo rate cut in the next policy (review),” said Jyotinder Kaur, economist at HDFC Bank in New Delhi.