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Macro Economy: Inflation may drop to 7.1%

By Xin Zhiming (China Daily)
Updated: 2008-07-11 09:12

China's consumer inflation will reportedly drop to 7.1 percent in June year-on-year, but the decrease will not necessarily result in an easing trend in the second half of 2008, analysts said.

Bank of China economists forecast that China could raise the interest rates in October as inflation picks up.

According to media reports citing insiders, the consumer price index (CPI), the key gauge of inflation, would be 7.1 percent in June, down from 7.7 percent in May and 8.5 percent in April. The National Bureau of Statistics is scheduled to announce the figure next Thursday.

"The relatively high CPI growth last June provides a favorable base for the drop," said Qiu Gaoqing, economist at the research department of Bank of Communications.

China's CPI started to pick up last June and reached 4.4 percent year-on-year, compared with 2.2 percent in January and 2.7 percent in February last year.

The stabilizing food prices, which account for about one-third of the CPI basket, are also an important factor behind the easing inflation, Qiu said.

Food prices had edged down in June in general despite the rise at the end of the month because of the heavy rain and flooding in southern regions, according to official statistics.

The slowdown in CPI growth for the second consecutive month, however, should not be cause for relief, said Liu Dongliang, an analyst with the China Merchants Bank.

"It's too early to be optimistic."

China started to raise oil product and electricity prices in late June, which economists said would lead to less than half a percentage point rise in the annualized CPI.

"But you cannot rule out further pricing reforms in the coming months," Liu said.

The research arm of the Bank of China said in a report that China may further raise prices of oil products in October, reversing the downtrend of CPI growth expected in the third quarter.

The possibility of an interest rate hike in that month, therefore, will increase, the report said.

On the other hand, growth of the producer price index, a leading indicator for CPI that measures factory-gate prices, has gained momentum recently, reaching 8.2 percent in May, the highest in more than three years.

"It indicates ensuing price rises in costs such as transport and labor," said Qiu, adding that CPI for the whole year may be 6.5 percent. Many economists forecast that the whole-year CPI growth may hover around 7 percent.