China’s annual inflation rate fell from 3 per cent to 2.2 per cent in June – a 29-month low. The June result was marginally better than forecasts centred on a result near 2.3 per cent.
What does it all mean?
The latest inflation data confirms that China’s policymakers can put inflation concerns to rest and squarely focus on ensuring a sustainable expansion. Especially given that not only is the annual inflation rate at a 29-month low, but the environment has been deflationary for the past three months. Even business inflation is going backwards at a rate of knots, now holding at a 32-month. It’s a good sign, if businesses are not incurring significant costs increases they are unlikely to increase prices to the end consumer over the next few months.
Food inflation has been the main driver of Chinese policy concerns in recent times, however that also held at a much more sedate 3.8 per cent over the past year – a vast shift from the highs of 14.8 per cent in the year to July 2011.
Overall it is clear that policymakers are winning their battle with inflation and the latest data gives authorities further reason to ease monetary policy and boost economic growth – especially given the numerous risks from abroad, China is well justified in seeking to stimulate the domestic economy – most likely through a further reduction in interest rates and the reserve ratio in coming months.
What do the figures show?
The annual rate of consumer price inflation eased from 3.0 per cent to 2.2 in June – a 29-month low. The June result was marginally better than forecasts centered on a result near 2.3 per cent. Over the month inflation fell by 0.6 per cent in June after a 0.3 per cent slide in May.
Food prices rose by 3.8 per cent over the year to June (6.4 per cent in May) while non-food prices rose by just 1.4 per cent in the year to June (1.7 per cent in May).
Producer prices (business inflation) fell by 0.7 per cent in June to stand 2.1 per cent lower than a year ago – a 32-month low. The annual rate of producer price inflation peaked in July 2011 at 7.5 per cent and has been declining since.
What are the implications for interest rates and investors?
The latest Chinese inflation data is certainly positive. Now the focus shifts to investment, consumption, trade and overall growth figures released later this week. The low inflation environment opens the door for further stimulus.
10 July 2012
