China January CPI seen at 2.0 percent despite food price rise

BEIJING Mon Feb 4, 2013 11:24pm EST

BEIJING (Reuters) - China's annual consumer inflation likely eased from December's seven-month high despite continued strength in meat and vegetable prices, with most economists seeing price pressures remaining at bay for a few months at least.

A median forecast of 17 economists showed inflation running at 2.0 percent in January, ahead of the Lunar New Year, China's most important holiday. That's down from a seven-month high of 2.5 percent in December, when a cold snap drove up vegetable prices.

"The fall will be food-driven, and not as steep as consensus has it, but should have a positive impact on the current mood, creating an impression of a Goldilocks economy with inflation under control and solid growth," wrote Credit Agricole economist Dariusz Kowalcyzk.

"This is unlikely to last: we see a modest growth slowdown and a pick up in inflation from Q213 on."

Where economists see a comfortable lack of price pressure, giving policymakers room to keep liquidity in the system for the time being, a Chinese shopper sees sticker shock.

Chinese consumers are particularly sensitive to food prices before the New Year, when far-flung families gather for once-a-year feasts.

Indeed, food prices are likely to be a significant driver for January's inflation figure. Data compiled by China's Ministry of Commerce shows that the prices of most vegetables continued to rise in January compared with end-December levels, as did prices for pork, China's staple meat.

Tofu, cooking oil and poultry prices fell, reflecting a steady fall in international soybean futures from record highs reached in the summer.

However, the price of beef and mutton, consumed more in the north and west, is at an uncomfortable 60 yuan ($9.64) per kilogram. That's more expensive than average retail beef prices tracked by the United States Department of Agriculture, despite much higher average incomes in the U.S. than in China.

Public discomfort with rising prices could increase this summer, when cyclical factors are expected to once more push up pork prices after a benign 2012.

That could test policymakers, which have allowed moderate policy easing to offset the impact of sluggish demand from China's export markets, and the ongoing effects of credit curbs designed to curb real estate speculation.

Nomura economists Zhiwei Zhang and Wendy Chen noted that sharp rises in input prices reflected in complementary Purchasing Managers' Index (PMI) surveys published last weekend points to an upward trend in inflation this year.

Producer prices in China tumbled for much of last year, as weak demand weighed on the cost of raw materials.

Economists polled by Reuters predicted China's producer price index likely dipped 1.6 percent in January from a year ago, moderating from December's annual factory gate deflation of 1.9 percent thanks to firming economic growth and a lower base of comparison.

Late last month, the Chinese Academy of Social Sciences revised up its growth forecast for 2013, reflecting a revival in the pace of growth that began in the fourth quarter. But it also revised up its forecast for 2013 inflation to 3.5 percent, from its previous outlook of 3.0 percent.

Wary of triggering a spike in inflation, the People's Bank of China has prefered quiet tweaks to forceful policy easing.

After cutting interest rates twice between June and July last year, it has abstained from further cuts despite widespread market calls for looser policy.

It has also refrained from lowering banks' reserve requirements (RRR) since May 2012, when it cut the ratio of cash it requires lenders to hold as reserves by 50 basis points to 20 percent for China's biggest banks.

Instead, the central bank has preferred in recent months to ease policy by adding cash through short-term open market operations, a measure that analysts say is more flexible than outright cuts in rates or reserve requirements.

China's National Bureau of Statistics will release official CPI and PPI data on Friday.

(Reporting By Lucy Hornby and China Economics Team; Editing by Kim Coghill)

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