Be calm and cautious

A continuous fall in both consumer and producer prices does not necessarily mean that deflation will take root in China because global commodity prices are climbing from last year's lows. Yet, it can serve as a check on optimism that takes recovery of the Chinese economy for granted.

China's consumer price index (CPI), the main gauge of inflation, fell 1.4 percent year on year in May. This is the fourth consecutive monthly decline since the index dropped 1.6 percent in February, the first fall since October 2002.

Meanwhile, China's producer price index (PPI) - an important measure of inflation at the wholesale level - fell 7.2 percent year on year in May, compared with a 6.6 percent drop in April and a 4.6 percent fall in the first quarter from the same period last year.