Consumer prices in China rose 1.6 percent year-on-year in September, marking the slowest pace of consumer inflation in 56 months, according to data released Wednesday. Meanwhile, factory-gate prices were down 1.8 percent year-on-year, extending a continuous slump in wholesale prices that kicked off 31 months earlier.
Amid these signs of weakening price growth some have called on the central government to take more forceful monetary policy action, including cuts to benchmark lending rates.
If anything, Chinese leaders should be cautious when it comes to using expansionary policy tools to jolt the economy. Local markets are already stocked with ample liquidity, as evidenced by recent declines in the Shanghai Interbank Offered Rate, a benchmark for borrowing in China's interbank market.
We should also remember that prices of goods are dictated by many unpredictable factors, such as geopolitical tensions, crop failures and extreme weather events, all of which could drive global commodity prices higher - with obvious implications for price inflation here in China.
The government undoubtedly realizes that hastily implemented rate cuts could have huge negative consequences for domestic prices. For the time being, tax cuts for consumers and businesses represent the best strategy to combat worsening economic conditions.
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