Inflation eases to near five-year low

Weak CPI to strengthen case for policy easing

China's consumer inflation hit a 56-month low in September, official data showed Wednesday, fueling concerns that the country's economy is still struggling with weak domestic demand.

The consumer price index (CPI), a main gauge of inflation, rose by 1.6 percent year-on-year last month, 0.4 percentage points lower than the previous month and the lowest level since January 2010, the National Bureau of Statistics (NBS) said in a statement.

Prices of pork, a staple of the Chinese diet, fell by 2.9 percent in September from a year earlier, dragging down the CPI by 0.09 percentage points, according to the NBS.

"The sharp deceleration of the CPI inflation is largely due to surprisingly low food prices during the Mid-Autumn Festival and before the National Day holidays. In our view, the anti-graft campaign could have significantly eased upward pressures on prices," Liu Ligang, chief China economist at ANZ Banking Group, said in a research note sent to the Global Times on Wednesday.

China's anti-graft watchdog strengthened supervision on using public funds to purchase mooncakes and other items for gift-giving or to hold extravagant banquets during the two holidays. Liu noted that the prices of tobacco and liquor have dropped since September 2013.

A high-end Kweichow Moutai liquor product, for instance, is now sold around 900 yuan ($146.7) to 1,000 yuan per bottle in supermarkets and online stores, compared to more than 2,000 yuan per bottle in 2012.

Yu Qiumei, a senior statistician with the NBS, also attributed the low inflation reading to a relatively higher base of comparison a year ago.

The producer price index (PPI), a key measure of inflation at the wholesale level, fell by 1.8 percent in September from a year earlier, compared to a 1.2 percent drop in August and marking a decline for the 31st straight month, data from the NBS showed.

Yu said crude oil and steel prices have dropped sharply, and the recent downtrend in international commodity prices has also posed growing downward pressure on the PPI.

"There is deflationary pressure at the factory gates, as the manufacturing industry is still facing severe overcapacity," Lian Ping, chief economist with Bank of Communications, told the Global Times Wednesday.

As for the whole year of 2014, many research institutions have lowered their inflation forecasts to the range of 2.0 to 2.2 percent.

"The annual CPI will be much lower than the official target of 3.5 percent, as the economy is facing downward pressure this year and overall domestic demand is sluggish," Zhou Jingtong, a senior analyst with the Bank of China, told the Global Times on Wednesday.

Analysts believe the low CPI reading will offer room for further policy easing.

Although the central bank conducted targeted monetary easing policies earlier this year, the effective interest rate level is still high, which has a negative effect on investment and production activity, Xu Gao, chief economist with China Everbright Securities, said in a research note e-mailed to the Global Times on Wednesday.

Lian predicts if the yuan funds outstanding for foreign exchange, an indicator of foreign capital flow in and out of the Chinese mainland as well as yuan liquidity at home, decline in coming months, the central bank is more likely to lower the reserve requirement ratio for all banks.

But economists hold divergent views on whether there will be any adjustment in interest rates to fuel the growth, with some expecting a cut in interest rates as early as the fourth quarter while others being uncertain.

"Central authorities might make a decision based on the coming GDP figures," Zhou said. He expects that if the GDP growth is lower than 7.3 percent in the third quarter, an interest rate cut is very likely.

China's economy grew 7.4 percent year-on-year in the first half of 2014. The NBS is scheduled to release the GDP data for the third quarter on Tuesday.