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Food price drop helps lower CPI

By Wang Xu (China Daily)
Updated: 2008-06-13 10:34

Falling food prices helped moderate inflation to 7.7 percent last month, but analysts believe there are worrying signs of upward pressure, given the continuous surge in oil prices and fresh influx of capital.

The consumer price index (CPI), a key gauge of inflation, fell below 8 percent for the first time in four months, according to the National Bureau of Statistics.

It came as food prices edged down 1.3 percent in May from the previous month.

The figures, released yesterday, may provide relief to policymakers who have named inflation as a top economic concern.

Food prices, which account for one-third of the CPI basket, gained 19.9 percent year-on-year in May, compared to 22.1 percent in April.

Non-food prices climbed 1.7 percent, compared with 1.8 percent in April.

"Although the inflation rate edged down, the pressure hasn't been relieved," said Tang Jianwei, an economist with Bank of Communications. "Surging oil prices and excess liquidity will continue to add to inflationary pressure in the second half."

To rein in inflation, the government has ordered companies to stabilize the prices of public utilities and fuel such as gasoline and diesel. The move has proved effective, but at the cost of billions of dollar in state subsidies.

Oil refiners such as Sinopec have suggested the government raise refined-oil prices, as their losses mount in the face of soaring crude oil prices in the international market. The retail prices of gasoline and diesel were last raised by 11 percent in November.

On Wednesday, the authorities said the producer price index for May - an indicator of wholesale and raw material prices - rose to 8.2 percent from April's 8.1 percent, boosted by double-digit increases in prices of oil, coal, steel and other industrial materials.

"If the overall inflation moderates by the end of this year, the government may allow prices for electricity and refined-oil products to go up," said Zhuan Jian, an economist with the Asian Development Bank.

Meanwhile, the ongoing financial turmoil in Vietnam may also increase inflation pressure in China. There are signs that overseas investors are diverting capital to China, further increasing liquidity.

China's foreign exchange reserves increased $74.5 billion in April alone, setting a new monthly record.

Over the weekend, the central bank ordered local banks to set aside more cash in deposits so as to curb excess lending. It raised the reserve requirement rate by one percentage point to a record 17.5 percent.

"If the central bank can keep money supply growth from rebounding, CPI could drop toward 5-6 percent later this year," said Goldman Sachs' economists Liang Hong and Song Yu in a research note.

"But any rebound in money supply growth will lead us to re-assess our tentative conclusion that inflation may have peaked in China."

The May CPI rose 7.3 percent in cities and 8.5 percent in rural areas.