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Inflation rate likely to fall

By Wang Xu (China Daily)
Updated: 2008-09-05 09:39

August consumer inflation may drop to a 14-month low on falling food prices, but inflationary pressure in the non-food sector will remain strong, economists said.

"We expect CPI to fall to 5.2 percent year-on-year in August from 6.3 percent in July - the lowest reading in 14 months," said Sun Mingchun, an economist with Lehman Brothers, attributing the decline to lower food prices.

China's CPI has eased since May, after peaking at 8.5 percent in April. This is largely due to the slide in food prices, which account for one-third of the CPI basket.

Wholesale prices for agricultural products rose to 164.3 points at August 29, compared with 162.8 points in July 31, according to an index compiled by the Ministry of Agriculture that monitors produce prices. Meanwhile, vegetable prices were the same at the end of July and August.

Bank of Communications economist Tang Jianwei also expects the CPI may gain 5.2 percent year-on-year, as last August's price peak kicks in.

"We expect headline inflation to fall back toward 5 percent to 5.5 percent in the fourth quarter of the year as food prices drop," said Wang Tao, an economist with UBS Securities. But Wang cautioned that the higher pressure of "core inflation" - which excludes price changes on food products and energy - will persist in the months ahead.

Over the past two years, consumer inflation has largely been confined to the food and energy sectors, with other goods and services prices rising slowly. Communications and clothing prices have declined over the past year, despite surging labor and raw material costs.

Analysts said the current drop in monthly CPI figures is largely due to the high prices of a year ago, as food costs continue to hover at a record-high level. The National Bureau of Statistics said price hikes in the past two years were the highest in the past decade, and an increasing number of goods now face inflationary pressure.

The latest signal is the producer price index, which monitors factory gate inflation. In July, it topped 10 percent, the highest since 1995. Although fierce competition has so far forced producers to absorb the price increases, they won't be able to keep doing that for long as a host of industries are reporting falling profits.

"A lower CPI would make September a good opportunity for the government to ease price controls," said Lehman Brothers' Sun Mingchun. "The move might cause a slight rebound in CPI inflation in September and October, but it is unlikely to exceed 6 percent year-on-year in the rest of the year."