China's August inflation accelerates to 2%

Inflation slightly rebounded in China in August due to higher food prices, making it harder for authorities to balance inflation control and monetary easing in a slowing economy.

China's consumer price index (CPI), a key gauge of inflation, rose 2 percent year on year in August, accelerating from 1.8 percent in July, the National Bureau of Statistics (NBS) said Sunday.

The increasing inflationary pressure and weakening economic growth will place the central bank in a monetary policy quandary, said Guo Tianyong, a finance expert at the Central University of Finance and Economics.

The higher CPI growth was mainly driven by food price hikes, as heavy rains affected vegetable supplies and global grain prices went up, said analysts.

Food prices, which account for nearly one-third of the prices used to calculate the CPI, climbed 3.4 percent in August from a year earlier, greater than 2.4 percent in July, the NBS said.

Vegetable prices jumped 23.8 percent year on year in August, while fruit prices surged 9.7 percent.

The base effect also contributed to the higher annual rate. China's CPI growth has gradually retreated since July last year, when it hit a 37-month high of 6.5 percent.

Zhang Liqun, a researcher with the Development Research Center of the State Council, or China's cabinet, said authorities should pay attention to preventing inflation pressure from regathering while easing monetary policies to support the softening economy.

"It's easy for prices to rebound faster than desired if we are not cautious," he said.

Despite the rebound, inflation's downward trajectory has not changed, as August CPI growth remained mild, said Liu Yuanchun, deputy head of the School of Economics at Renmin University of China.

In the first eight months, the CPI gained 2.9 percent on average over the same period last year, well within the 4-percent government target for the whole year, according to the NBS.

Wang Jun, a researcher with the China Center for International Economic Exchanges, urged the government to further loosen the monetary supply, as he expects inflation to retreat again in the fourth quarter.

"There is no need to worry about inflation. The priority should be to stabilize economic growth," he said.

China's inflation rate weakened continuously to reach a 30-month low in July after growth cooled to 7.6 percent in the second quarter, the slowest rate since the first quarter of 2009.

Wang said the continuous falling of the producer price index (PPI) is evidence that deflation already exists in industrial product prices, which he said indicates a downbeat outlook for the economy.

The PPI, which measures inflation at the wholesale level, slumped 3.5 percent year on year in August, compared with a 2.9-percent decline in July, the NBS said.

It marked the sixth straight month of decline after China's PPI saw a drop in March for the first time since December 2009.

On a month-on-month basis, the CPI grew 0.6 percent in August and the PPI moved down 0.5 percent, according to the NBS.

In August, producer purchase prices shed 4.1 percent year on year and 0.5 percent from July, the NBS data showed.

Lian Ping, chief economist at the Bank of Communications, said the central bank will likely keep interest rates unchanged if inflation continues to increase in the coming months.

"However, the possibility of another interest rate cut cannot be ruled out, as it's still necessary to reduce borrowing costs for enterprises," he said. "But I do not expect continuous, large rate cuts."

The central bank has cut its lending and deposit rates twice this year, as well as lowered the amount of funds that banks must keep in reserve.

Using an investment prod to stimulate the economy, China's top economic planner approved 55 investment projects worth 1 trillion yuan (157.7 billion U.S. dollars) in two days last week to build highways, ports and railways across the country.

China will continue its proactive fiscal policy and prudent monetary policy to maintain economic growth and keep prices stable, President Hu Jintao said in a keynote speech delivered Saturday at the Asia-Pacific Economic Cooperation (APEC) CEO summit held in Russia.