China's CPI moderates in Nov, positive to markets

People select fruit in a supermarket in Shanghai, east China, Dec. 8, 2013. China's consumer price index (CPI), a main gauge of inflation, grew 3 percent year on year in November, down from the 3.2 percent recorded in October, the National Bureau of Statistics (NBS) said on Monday. (Xinhua/Yang Shichao)

Monday's figures showed inflation in China easing in November.

Analysts believe slower rising prices coupled with slightly improving growth prospects should positively influence markets and policymakers.

The consumer price index (CPI), a main gauge of inflation, grew 3 percent year-on-year in November, down from 3.2 percent in October, the National Bureau of Statistics (NBS) said on Monday.

Inflation was 3 percent in cities, and 3.1 percent in rural areas. Food prices rose 5.9 percent in the last year, while non-food products edged up only 1.6 percent.

On a month-to-month basis, November CPI contracted 0.1 percent and food prices dropped 0.2 percent from October. Prices of non-food products were flat.

In the first 11 months of 2013, CPI rose 2.6 percent year-on-year, well below the government target for the year of 3.5 percent.

The producer price index (PPI), which measures inflation at the wholesale level, contracted 1.4 percent year-on-year in November, following a 1.5 percent drop in October.

LOWER FOOD INFLATION

Yu Qiumei, a senior statistician with the NBS, said food prices, which account for roughly a third of CPI, edged down slightly in November. Grain, beef, mutton, milk and fruit all rose month-on-month, but pork, fresh vegetables, eggs and aquatic products were all down.

November's vegetable prices contracted by 3.8 percent from October, but Yu stressed differences in vegetable prices across regions. In the northeast and northwest vegetable prices rise due to snow and low temperatures, while vegetable prices fell in most other parts of the country.

The moderation in CPI was due to lower food inflation, according to a research note by Zhi Xiaojia and Lu Ting of Bank of America Merrill Lynch.

Annualized food inflation fell to 5.9 percent from 6.5 percent in October. Vegetable and pork prices dropped 3.8 percent and 0.5 percent in November.

"We expect CPI inflation to remain around 3.0 percent year-on-year in December, and we forecast an average of 3.1 percent CPI inflation in 2014," the research note read.

Qu Hongbin, HSBC's chief China economist, said November CPI of 3 percent was lower than market and HSBC expectations of 3.1 percent.

Overall inflation pressure remained modest in November thanks to relatively weak demand conditions and gradual recovery, Qu said in a research note.

"With PPI remaining in negative territory for 21 consecutive months, upstream price pressures will continue to be manageable," Qu said.

Zhang Liqun, a researcher with the Development Research Center of the State Council, China's cabinet, said overall prices for November were stable and factors favorable to stable food prices are increasing.

Seasonal factors behind price fluctuations of fresh vegetables are decreasing and CPI inflation could ease further, Zhang said.

POSITIVE FOR MARKETS, POLICYMAKERS

Zhi and Lu, of Bank of America Merrill Lynch, said with November CPI inflation slowing more than expected and PPI inflation remaining negative, markets could breathe a sigh of relief. In the past few weeks, markets have been worried that the central bank could be forced to tame the rising CPI by tightening the credit supply, leading to rising bond yields.

Monetary policy is expected to remain neutral in December and into 2014, even though money market rates and bond yields could rise on interest rate liberalization, according to Zhi and Lu.

"Muted CPI inflation and slightly better growth than expected should be positive for markets," they said.

This latest data confirms that an economy which slowed down noticeable earlier this year has regained solidity, and analysts expect the recovery to continue.

Gross domestic product growth accelerated to 7.8 percent in the third quarter this year, up from 7.5 percent in the second and 7.7 percent in the first.

Qu expects inflationary pressure to remain modest across the board, held down by a negative output gap, despite anticipated seasonal fluctuations in food prices around Chinese Lunar New Year on Jan. 31.

"Monetary policy will retain its status quo over the coming quarters," Qu said, maintaining that inflationary pressure would be manageable, allowing policymakers to support growth during a period of structural reform.