Inflation in the People’s Republic of China (PRC) last month was lower than forecast at 4.9 percent, but price pressures continued to build and could force the central bank to stick to its course of gradual monetary tightening.
That was underlined by a Xinhua news agency report that Chinese banks extended 1.2 trillion yuan (US$182 billion) in new lending last month — in line with expectations and nearly a fifth of 7 trillion yuan in loans that many assume is the government’s full-year target this year.
The People’s Bank of China raised interest rates last week for the second time in just over six weeks to battle inflation.
It has also raised the amount of money banks have to hold in reserve seven times since the start of last year to try to mop up excess liquidity, which has fueled inflation.
Last month’s rise in the consumer price index (CPI) from a year earlier was below a median forecast in a Reuters poll of 5.3 percent and followed an annual increase of 4.6 percent last year. However, talk had swirled in markets on Monday that the figure could be below 5 percent.
“Though the market cheered the softer-than-expected CPI, it may provide a false dawn and should be considered with caution mainly because recent indicators and developments still signal that upside risk to inflation persists,” said Connie Tse, economist at Forecast PTE in Singapore.
In one sign of the accumulating pressures, core inflation, stripped of volatile food prices, jumped to 2.6 percent year on year, the highest since at least 2002, from 2.1 percent a month earlier.
In another sign, soaring global commodity costs pushed the producer price index (PPI) up 6.6 percent last month, accelerating from 5.9 percent in December and well above the 6.1 percent rise forecast by analysts.
“The large increase in PPI inflation suggests that price pressures will remain uncomfortably strong, at least for the next few months,” said Brian Jackson, an economist with the Royal Bank of Canada in Hong Kong.
Asian stocks and global commodities were largely flat, having jumped on Monday when rumors of a lower-than-expected inflation figure first swirled through markets, easing fears that China would have to unleash aggressive monetary tightening.
The Chinese National Bureau of Statistics also announced an adjustment in the way it calculates consumer price inflation, saying that it better reflected the evolution in Chinese consumption patterns.
Housing was given a much larger share of the new CPI basket, while the weighting of food prices was reduced. These changes were consistent with an economy that is fast becoming more prosperous, allowing urbanites to spend a smaller portion of their incomes on basic needs and more on big-ticket items.
Many in the market had expected that the adjustment, conducted every five years, would lower the CPI, but the statistics agency said the adjustment had actually added 0.024 percentage point to last month’s reading.
“February CPI is expected to be about 5.2 percent, and if it is significantly lower than that, we may conclude that inflation in China has changed fundamentally. Or we can say that the CPI indicator itself is quite doubtful in terms of reliability,” said Gao Shanwen, chief economist with Essence Securities in Beijing.
However, at least some investors and analysts took the statistics agency at its word, and said that lower inflationary pressure would reduce the need for a big dose of interest rate increases.