China price pressures 'in check'

Updated: 2006-11-14 06:47

BEIJING -- China's annual consumer inflation rate slowed to 1.4 percent in October from 1.5 percent in September, the government said on Monday, showing price pressures remain in check despite the country's breakneck economic growth.

The figure was lower than the 1.6 percent forecast of economists polled by Reuters and followed a surprisingly steep fall on Friday in factory-gate inflation to 2.9 percent in October from 3.5 percent in September.

"This really takes away any worries at all about inflation in China," said Tim Condon, head of Asian financial market research at Dutch bank ING in Singapore.

A slower rise in the price of food, which makes up a third of the consumer basket, pushed the overall rate of inflation lower.

The National Bureau of Statistics said food cost 2.2 percent more in October than a year earlier, compared with a 2.4 percent rise in September. Vegetable prices dropped at an annual pace of 5.7 percent last month, possibly due to unseasonably mild weather.

Goldman Sachs responded to the weaker-than-expected readings by lowering its inflation forecasts for 2006 and 2007.

With global commodity prices softening and Chinese money growth easing, the bank said it now expected year-average consumer price inflation of 1.4 percent in 2006 and 2.2 percent in 2007. It had previously forecast 1.8 percent and 2.8 percent, respectively.

Clothes, cars, tuition and telecommunications recorded outright price falls in October from a year earlier, but Condon said fears China could relapse into deflation were far-fetched.

China suffered falling prices in 2002, 1999 and 1998, but Condon said those episodes were associated with recession in the United States and the aftermath of the Asian financial crisis.

"The global backdrop is much more supportive today than in either of those episodes. I think we'll see low inflation, rather than deflation," he said.

Qian Wang at JPMorgan Chase agreed that fears of deflation should recede as investment growth slowed, banishing the specter of supply gluts driving down prices for a wide range of manufactured consumer goods.

A cyclical slowdown in the economy would hold down costs, but the gradual liberalization of administered prices for energy and other resources should put a floor under prices, he added.

"Overall, we expect the inflationary environment to remain stable, with moderate upward pressure on headline CPI inflation persisting into 2007," he said in a note to clients.

Ben Simpfendorfer with Royal Bank of Scotland in Hong Kong said benign inflation gave policy makers the luxury of being able to concentrate on reducing China's bulging external surpluses.

These are bloating the money supply and funding an investment binge that threatens to destabilize an economy that is growing at a double-digit pace for the fourth year in a row.

"There are few implications for policy," he said of the inflation report. "This provides them little bit of leeway, so they have room to focus on the trade surplus."

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