China's CPI drops from 10-month high

China's consumer price index (CPI), a main gauge of inflation, rose 2.1 percent year on year in March, down from a 10-month high of 3.2 percent in February, according to official data released Tuesday.

The National Bureau of Statistics (NBS) mostly attributed the drop to lower food prices. It said in a statement that year-on-year growth in food prices slowed to 2.7 percent last month from 6 percent in February.

On a month-on-month basis, food prices dropped 2.9 percent in March, as rising temperatures led to an increase in vegetable supplies and food demand dropped from February, the month in which the traditional Spring Festival holiday fell this year.

The March CPI was below experts' forecasts of around 2.5 percent.

Wang Jun, an economist with the China Center for International Economic Exchanges, said mild inflation in the first quarter laid a good foundation for achieving this year's inflation control target.

China aims to hold this year's consumer inflation to around 3.5 percent, according to the government work report released last month.

With China maintaining a prudent monetary policy this year, the country will not encounter intense inflationary pressure in the first half, Wang said.

The country will maintain a proactive fiscal policy and a prudent monetary policy this year, as reiterated in both the government work report and a central economic work conference held last December to set the tone for this year's economic policymaking.

Liu Ligang, an economist with ANZ National Bank Ltd., said the recent outbreak of the H7N9 avian influenza virus will weaken demand for meat products, which will help ease inflationary pressure in the next few months.

As of Monday, the country had confirmed 24 human infections of the H7N9 avian influenza virus in east China's Shanghai Municipality and Anhui, Jiangsu and Zhejiang provinces. So far, seven people infected with the newly discovered strain of bird flu in China have died.

The sharp decline in the CPI means the central bank is less likely to implement tightening policies in the next two to three months, Liu said.

"However, in the face of pressures from capital inflow and rising property prices, we believe the central bank will maintain a prudent monetary policy," according to Liu.

Wang also said he believes the prudent monetary policy is the appropriate choice for China at this time, arguing that the present macroeconomic policy can ensure that the country realizes its economic growth target of 7.5 percent.

"As China is experiencing a sound employment rate and a normal level of inflation at present, maintaining the current intensity of the current policies is advisable," Wang said.

He did not rule out the possibility of policy changes in the event that economic growth shifts at a relatively fast pace.

The NBS is scheduled to release GDP data for the first quarter on April 15.

Wang said inflationary pressure may ramp up in the latter half of the year, partly because the CPI remained at a low level in the latter half of 2012, providing a low basis for calculating inflation for the same period this year.

From July to December 2012, consumer inflation stayed between 1.8 percent and 2.5 percent, lower than last year's actual inflation rate of 2.6 percent, NBS data shows.

Meanwhile, meat products may enter another rising cycle in the latter half, Wang said.

Liu agreed, saying that demand for meat will get back on track if the H7N9 cases wane, causing possible meat supply shortages and adding to inflationary pressure.

The NBS also said China's producer price index (PPI), which measures wholesale inflation, fell for the 13th consecutive month. It dropped 1.9 percent year on year, suggesting continued weak market demand.