Inflation unexpectedly slows

By Nerys Avery (Bloomberg)
Updated: 2006-11-13 15:05

Inflation in China, the world's fastest-growing major economy, unexpectedly slowed in October as the cost of food increased at a slower pace.

The consumer price index advanced 1.4 percent from a year earlier after rising 1.5 percent in September, the Beijing-based National Bureau of Statistics said in a statement today. That's less than the 1.6 percent median forecast in a Bloomberg News survey of 16 economists.

Central bank Governor Zhou Xiaochuan, who raised lending rates twice this year partly to slow investment growth, last week said excess manufacturing capacity in some industries is helping contain prices. With a surge in spending on factories and real estate also cooling, the bank may hold off on raising interest rates further until next year.

"If the government does raise interest rates it will be to curb investment rather than because of any worries about inflation," said Leslie Khoo, an economist at Forecast Singapore Pte. "Inflation is likely to remain well behaved."

Goldman Sachs Group Inc. economists last month trimmed estimates for inflation this year and next, citing softening global commodity prices, and said they no longer expect the central bank to raise interest rates again this year.

The People's Bank of China raised lending rates on Aug. 18 for the second time in four months to slow bank lending and bring investment under control. China has the fourth-lowest inflation rate among 16 Asian economies tracked by Bloomberg.

Food Costs

Zhou has also sought to limit increases in money supply to stave off inflation and restrain funding for investment projects. M2, the broadest measure of money supply, grew at the slowest pace in 14 months in September after reaching a two-year high in January, as the central bank sold bonds and forced banks to set aside more money as reserves.

"On the one hand, we have expansionary money supply, however inflation is low," he told reporters in Frankfurt on Nov. 10. "Chinese manufacturers have overcapacity in some sectors so competition brings the price down."

Gains in the cost of food, which accounts for about a third of the basket of goods that is used to compile the consumer price index, eased for the first month in four. Food costs climbed 2.2 percent, slowing from September's 2.4 percent gain, as vegetable prices fell. Grain prices rose for an 11th straight month, climbing 3.7 percent after increasing 3.4 percent in September.

"Food is what drives inflation because it has such a heavy weighting in the index," said Kent Yau, deputy head of research at Core Pacific-Yamaichi International in Hong Kong. "Other prices have been quite stable, and that should provide room for the government to keep liberalizing energy and utility charges."

Pricing Reform

Non-food inflation last month eased to 1 percent from a year earlier, the slowest pace since April, as water, electricity and other household utility costs posted the smallest gain in almost two years.

Over the past two years, Premier Wen Jiabao took advantage of slower food price increases and falling consumer goods costs to raise caps on fuel and utility charges, to better reflect international oil prices and to improve the use of resources.

Most water companies in China are running at a loss, natural gas sells for half the international price and fuel costs are not aligned with overseas markets, the World Bank said in February. The price of electricity in Shanghai during peak hours is less than half of what households in New York pay.

Producer Costs

Pressure on prices from higher commodity and oil costs is also easing. Producer-price inflation unexpectedly slowed in October, as gains in the cost of fuel and excavation products including copper and zinc slowed.

The producer price index, which shows the price of goods at the factory-gate, climbed 2.9 percent from a year earlier, the government said last week, the smallest increase since May.

Some economists expect inflation to accelerate next year on rising steel and cement charges, and as the lagged impact of surging money supply growth earlier in 2006 feeds through to consumer prices.

Anhui Conch Cement Co., China's largest cement producer, on Oct. 30 said profit in the third quarter nearly tripled from a year earlier as prices rose because of soaring demand from the construction industry.

Wheat-growing regions of China, the world's largest producer of the grain, had as little as 10 percent of normal rainfall last month, worsening a two-month drought that threatens to boost crop prices.

"Food prices should rise going into the new year, domestic energy prices are increasing, and midstream heavy industrial prices have already started to recover," said Jonathan Anderson, chief Asia economic at UBS AG in Hong Kong. He expects headline consumer price inflation to accelerate toward 3 percent by the middle of next year.

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