Chinese inflation jumped in January, breaking a streak of five straight monthly declines, but seasonal factors were largely to blame and price pressures were expected to weaken in the coming months.
The consumer price index rose 4.5 per cent from a year earlier, up from December’s 4.1 per cent pace. The main cause of the rebound was a shopping blitz before last month’s Chinese New Year holiday, which pushed up food prices, an effect which has regularly been seen in the past and is likely to be temporary.
Core inflation, stripped of food costs, rose much more slowly, giving Beijing some room to stimulate the slowing economy if necessary.
“It is very likely that after the holiday, prices will come down, especially for food. Next month’s number should be lower and that will ease concerns,” said Ken Peng, an economist with BNP Paribas.
But even if January’s rebound was a seasonal aberration, the fact that it was well above market expectation for steady inflation may reinforce the caution of policymakers.
“They will be in no hurry to ease policy,” Mr Peng said.
Beijing has been reluctant to take aggressive action to prop up growth, with the economy slowing only very gradually so far. The government is also wary of repeating the massive debt-fuelled stimulus it used in 2009 to rescue the economy from the global financial crisis.
Weakening inflation is unlikely to prompt a change in that cautious stance, but it does expand the comfort zone for policymakers as they debate tactics should the economic picture worsen dramatically.
The International Monetary Fund this week warned China that its economic growth could drop by half in the event of a sharp recession in Europe because of trade linkages and that it needed to have a fiscal pump-priming package at the ready.
Controlling inflation, which was China’s top policy focus last year, is likely to slip down the agenda this year. Slowing economic growth, stable commodity prices and easing food inflation are together likely to cap price pressures, according to Ding Shuang, an economist with Citigroup. He forecast that China’s inflation would average 3.5 per cent this year, substantially below last year’s 5.4 per cent average.
However, from a slightly longer-term perspective, price pressures are likely to flare up again. Economists say that China has entered a phase in its development where inflation is likely to remain elevated and largely impervious to government action.
One major reason for that is demographic change, with China’s one-child policy leading to a reduction of the number of workers in the country and pushing up wages. Even as the economy has slowed this year, business in China’s manufacturing heartland along its coast have complained of a shortage of workers and had to increase pay packets, often by as much as 15 per cent.
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