China's 4-month low inflation leaves room for further monetary policy easing

Chinese inflation eased to a four-month low of 2 percent in August with analysts saying the data could allow financial leaders to further ease monetary policy.

The Consumer Price Index (CPI), a main gauge of inflation, increased 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 in August rose 3 percent from a year ago, lifting the CPI by 1.01 percentage points, according to the National Bureau of Statistics.

The figures come at a time of concern over China's economy as the effects of mini-stimulus measures this year to prop up slowing growth have waned and fears of a bust in the property sector intensify.

August's results were also lower than the median estimate of 2.2 percent in a survey of 15 economists by the Wall Street Journal. The government in March set a target of 3.5 percent for the year.

Moderate inflation can be a boon to consumption as it encourages consumers to buy before prices go up, while falling prices encourage shoppers to delay purchases and companies to put off investment, both of which can weigh on growth.

Despite the August drop, analysts said the outlook is for higher inflation in the coming months as utility prices rise and depleted pig stocks push up pork prices and overall food costs.

Economist Hua Changchun and colleagues at Nomura said in a report that inflation is expected to remain moderate in September, "leaving room for further policy easing".

It will then start to go up and "keep rising to an average of 3 percent in 2015 on tight labor market conditions, the hog cycle and price liberalization in the utility sector", they added.

With consumer inflation at a relatively moderate level, China's producer price index (PPI)--a measure of costs for goods at the factory gate and a leading indicator of the trend for CPI-- dropped 1.2 percent year on year in August, marking a decline for 30 months in a row, according to the NBS.

The result compared with a decrease of 0.9 percent in July. The last PPI increase was in January 2012, when it rose 0.7 percent.

Some economists have expressed concern, saying the "deflation risk is rising" in China. "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.

But not all were as worried. "This is not a major cause for concern since it appears that firms are mostly just passing on lower industrial input costs, as a result of falling commodity prices, rather than slashing their profit margins in response to weak demand," Julian Evans-Pritchard, China economist at Capital Economics, said of the PPI decline.