China dipped into deflation at the consumer level in February for the first time in more than six years, giving the central bank scope to cut interest rates further if it needs to boost the economy.
The consumer price index (CPI) fell 1.6% in the year to February, bang in line with forecasts, but both the government and a number of private economists played down the risk of a protracted period of falling prices.
The lurch lower in February was largely because of the high base of comparison: in the 12 months to February 2008, consumer prices were up 8.7%, near a 12-year peak, as the cost of food, oil and imported raw materials soared.
The year-on-year drop in the CPI was the first since December 2002. But the National Bureau of Statistics said that, even if prices had been unchanged in February from the end of 2008, the statistical effect of last year’s high inflation rate would have been to drive the CPI down 2.5%.
With China pursuing an active fiscal policy and a moderately loose monetary policy, the statistics office said it was wrong to jump to the conclusion that China had relapsed into deflation for the third time in a decade.
However, it drew attention to a sharp decline in prices of raw materials like crude oil, iron ore and metals due to the global economic slowdown. This was the driving force behind acceleration in the pace of decline in China’s producer prices, also announced by the NBS today, to 4.5% percent in the year to February from 3.3% in the 12 months to January.
The concern of some economists is that these deflationary pressures will intensify, despite China’s 4 trillion yuan ($585 billion) stimulus plan, because the economy is saddled with excess production capacity at a time of depressed global demand.
Power demand in the first two months declined 3.7% percent from a year earlier. The industry minister stating it is too premature to conclude that Chinese manufacturing was over the worst despite some positive signs.
Brooks Macdonald Asset Management 2009 ©
