CPI at 4-month low, factory contraction continues

Residents purchase vegetables in a supermarket in Hengshui, north China's Hebei Province, Sept. 4, 2014. China's consumer price index, a main gauge of inflation, grew 2 percent year on year in August, the National Bureau of Statistics said Thursday. The August CPI growth rate was lower than the 2.3 percent seen in July. (Xinhua/Mo Yu)

China's consumer inflation rate eased to the lowest level in four months in August, while factories' wholesale prices contracted for a 30th straight month, the National Bureau of Statistics (NBS) said on Thursday.

The latest retail and wholesale consumption figures indicated the Chinese economy is still facing an overcapacity problem.

The Consumer Price Index (CPI), a main gauge of inflation at retail level, rose 2 percent year on year in August, compared with 2.3 percent in July.

Higher food prices were the main contributor to the CPI growth. Food prices, which account for about one-third of the weighting in the CPI calculation, rose 3 percent from a year ago in August, lifting the CPI by 1.01 percentage points.

In the food category, the price of fresh fruit surged 21.2 percent, increasing the CPI by 0.41 percentage points. Meanwhile, prices of pork, a staple of the Chinese diet, dropped 3.1 percent, dragging down the CPI reading by 0.1 percentage points.

For the first eight months, China's CPI rose 2.2 percent from a year ago, which was far lower than the government full-year inflation control target of 3.5 percent.

Hu Yuexiao, chief economist of Shanghai Securities, saw some pressure but no risk in price levels in the coming months.

"Even if food prices continue to rise, inflation will head for a steady level as the economic growth won't accelerate rapidly," Hu said.

As carryover factors begin to wane in the coming months, the CPI will probably ease further, according to Tang Jianwei, a macroeconomic analyst with the Bank of Communications.

Tang forecast the full-year CPI growth to be around 2.2 percent.

With consumer inflation at a relatively moderate level, analysts placed more attention on the reading of China's producer price index (PPI), which measures inflation at wholesale level.

According to the NBS, the PPI dropped 1.2 percent year on year in August, marking a decline for 30 months in a row.

The decline of PPI in August was deeper than the 0.9-percent contraction seen in July, confirming pressure from slowing economic growth.

"We are not optimistic about the oversupply of industrial goods as overcapacity still weighs on industrial product prices," said Yu Qiumei, a senior NBS statistician.

In the first eight months, the country's PPI dropped by 1.6 percent from a year ago.

"The August CPI and PPI figures showed across-the-board weakness in the economy," said Ma Guangyuan, director of Renmin University's private investment research center.

He said a deeper PPI decline last month meant the economy was still in trouble.

China's economy expanded 7.4 percent year on year in the first half of 2014.

However, Premier Li Keqiang on Wednesday said China can meet its major economic goals this year and that policymakers will not be distracted by short-term fluctuations of individual indicators.

In his keynote speech at the Summer Davos forum on Wednesday, Premier Li suggested electricity consumption, freight volume and other indicators had "fluctuated somewhat" in July and August.

He said the fluctuation was "inevitable and within expectation," citing a complex and volatile domestic and international economic situation, as well as the base figures of last year.

"We focused more on structural readjustment and other long-term problems, and refrained from being distracted by the slight short-term fluctuations of individual indicators," according to the premier.

China's power consumption slowed again in July, expanding only 3 percent year on year, which was sharply lower than the 5.9-percent recorded in June, according to the National Energy Administration (NEA).

The NEA will release its latest figure later this month.