China's inflation up as economy stabilizes

China's consumer prices increased at a four-month-high pace in May while producer prices declined at a five-month-low pace, official data showed Tuesday, adding to signs of stabilization in the world's second largest economy.

The Consumer Price Index (CPI), a main gauge of inflation, increased 2.5 percent year on year in May, up from 1.8 percent in the previous month, according to the National Bureau of Statistics (NBS).

Accelerated increases in food prices were the main contributor to the higher CPI figure. Food prices increased 4.1 percent year on year, nearly double the 2.3 percent in April, lifting the CPI figure by 1.35 percentage points.

The producer price index (PPI) contracted 1.4 percent year on year in May, the 27th consecutive month of decline. However, the rate of decline narrowed from April's two percent to a five-month low.

DEMAND EXPANDING, ECONOMY STABILIZING

The rising consumer price increases and slowing producer price declines are widely seen as a boon to the Chinese economy, which grew at its weakest pace in 18 months during the first quarter.

Both the year-on-year and month-on-month decreases narrowed from those in the previous month, signalling rebounding market demand in industrial products, said Yu Qiumei, a senior statistician with the NBS.

For the CPI, while the NBS attributed the higher figure mainly to the "carry-over effect" resulting from a low comparison basis last year, which contributed 1.6 percentage points to the figure, real price increases still contributed 0.9 percentage point.

The data also came as China's economy shows tentative signs of stabilizing. Official data showed earlier this month that growth in China's manufacturing sector continued to accelerate in May, hitting a five-month high.

Kuang Xianming, director of the Research Center for Economy at the China Institute For Reform and Development (CIRD), highlighted a positive change in the CPI data.

"A notable change is that the CPI reversed the month-on-month decline recorded for the previous two months, signalling that the endogenous power of the economic growth is increasing," Kuang told Xinhua.

"It's also a reflection of improving demand. And the central bank's targeted RRR cut will help unleash more demand.

Prices for housekeeping, processing and maintenance services jumped 7.1 percent and those for tourism surged 8.1 percent year on year, much higher than the average growth rate.

Kuang deemed these figures a good sign for the whole economy as they reflected the "continuous upgrading of the consumption structure."

TARGETED EASING UNAFFECTED

Despite rising consumer price inflation and declining producer price deflation, experts said the policy of "targeted" easing would stay.

These readings could ease concerns about deflation, while the rise of CPI inflation could make some people concerned about the prospect of incoming easing measures, said Lu Ting, chief China economist with Bank of America Merrill Lynch.

"We believe that the threat of deflation in China is quite small, and the rise of CPI inflation to 2.5 pct, which is still far below the 3.5 percent government target, won't impact the scale and pace of the ongoing mini-stimulus," Lu added in a research note.

To steady growth near its target of 7.5 percent without disrupting plans to restructure the economy, the central government has unveiled a string of targeted measures, including cutting reserve requirement ratios (RRR) for rural banks, speeding up railway and public housing construction, and tax breaks for small businesses.

China's central bank announced on Monday that it will cut the RRR by 0.5 percentage points for banks engaged in proportionate lending to agricultural and small firms, taking effect June 16.

Lu expects CPI inflation to stay at a moderate level during the rest of the year, as the price increase acceleration, which is partially a result of a one-off base effect, is not sustainable.

"We expect CPI inflation to stay around 2.5 percent in the next several months while PPI inflation will pick up," Lu said.

Kuang said the CPI might go up further in the next few months as market-oriented reforms will gradually correct "price distortions."

However, the possibility for the CPI to rise above the 3.5-percent target for 2014 is very small, Kuang added.