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Falling food prices drive inflation to 22-month low

By Wang Xu (China Daily)
Updated: 2008-12-12 07:14

Special coverage: Central Economic Work Conference Related readings:  China's CPI may ease to 1.2% in Dec  China's Nov CPI drops to 21-month low  China's CPI projected to slide further  China CPI eases to 4% in October

Inflation dropped to a 22-month low in November, giving the government more room to further cut the interest rate to boost the economy.

The consumer price index (CPI) increased 2.4 percent year-on-year last month, down from 4 percent in October, the National Bureau of Statistics (NBS) said Thursday.

Falling food prices were the main contributor to the drop in consumer inflation, which peaked at 8.6 percent in February. Last month, food prices, which account for one-third of the CPI basket, rose 5.9 percent year-on-year, the lowest in almost two years. On a month-by-month basis, they dropped 1 percent.

The CPI for the first 11 months of this year, however, was up 6.3 percent year-on-year, the NBS said.

Producer price index figures released Thursday showed that last month wholesale inflation dropped to 2 percent year-on-year, the lowest in 31 months.

The two inflation graphs suggest an imminent rebound of consumer prices is unlikely. "We could start dealing with deflation soon, given weakening demand and waning consumer confidence," said Chen Jianqi, an economist with Bank of Communications.

The economy has been losing steam because of the deepening global financial crisis. It has made Goldman Sachs Group Inc cut its forecast for the country's economic growth next year from 7.5 to 6 percent. Earlier, the World Bank forecast the GDP growth would slow down to 7.5 percent.

Analysts said this year's harvest would bring down grain prices, one of the main drivers of soaring inflation earlier this year.

The government's decision to reform the oil pricing mechanism from Jan is likely to reduce fuel prices, too.

Consumer inflation is likely to drop below 2 percent in December and would be around 6 percent for the whole of 2008, experts said.

"There is further scope for the central bank to ease the monetary policy in order to avoid excessive slowdown and stave off deflation," Jing Ulrich, JP Morgan chairman for China Equities, said.

The central bank has cut the benchmark lending rate from 7.47 percent to 5.58 percent since September to boost the economy with a moderately relaxed monetary policy. It has lowered the lenders' reserve requirement ratio and scrapped curbs on local banks' monthly loans, too, as part of its efforts to boost liquidity.

The other major step to boost the economy is the $586-billion stimulus package the government announced on Nov 9. The package, to last till 2010, is expected to generate an additional annual GDP growth of 1 percentage point and create about 1 million jobs.

And Ulrich said he expected "the government to take further fiscal stimulus measures, particularly to boost domestic consumption" and make it a more important engine of growth.