China January inflation plunges to five-year-low 0.8%

CHINA’S inflation plunged to a more than five-year low of 0.8 percent in January, official data showed Tuesday, fuelling fears the world’s second-largest economy is on the brink of a deflationary spiral.

The rise in the consumer price index (CPI) was sharply down from the 1.5 percent recorded in December, and was the weakest since 0.6 percent recorded in November 2009, according to the National Bureau of Statistics.

It was also short of the median forecast of 1.0 percent in a survey of analysts by Bloomberg News and came despite a surprise interest rate cut in November.

Moderate inflation can be a boon to consumption as it encourages consumers to buy before prices go up, while falling prices encourage shoppers to delay purchases and companies to put off investment, both of which can hurt growth.

Analysts warned of deflation in the China, a key driver of global expansion, and urged Beijing to take more measures to boost the economy.

“The weak inflation profile suggests that the deflation has become a real risk for China, thus paving way for further monetary policy easing,” ANZ economists Liu Ligang and Zhou Hao said in a research note.

Liu Dongliang, an analyst with China Merchants Bank in Shanghai, noted that consumption may have started to be affected by China’s growth slowdown, as services and consumer goods prices slumped last month.

“We should get vigilant about this sign and pay high attention to changes in the job market,” he said in a research note.

“Consumption played a key role in stabilising economic growth last year. If consumption cools down while investment struggles to rebound, the economy will face even more trouble,” he said.

China’s economy grew 7.4 percent in 2014, its weakest for almost a quarter of a century, and slower than the 7.7 percent in 2013.

CPI was 2.0 percent last year, down from 2.6 percent in 2013 and well below the government’s target of about 3.5 percent.

The central People’s Bank of China last week imposed an across-the-board cut in the percentage of funds banks must hold in reserve, the first such reduction in nearly three years to boost growth.

That followed November’s rate cut by the bank in November, the first in more than two years. Analysts had expected further monetary easing as the economy shows more signs of distress.

The NBS said in a separate statement that the producer price index (PPI) — a measure of costs for goods at the factory gate and a leading indicator of the trend for CPI — declined for the 35th straight month in January.

The 4.3 percent year-on-year PPI fall was the biggest since October 2009. The last time the PPI rose was three years ago.

China’s economy has shown further signs of weakening momentum this year.

The Purchasing Managers’ Index (PMI), which tracks activity in factories and workshops in the country and is a closely watched indicator of the health of the Asian manufacturing powerhouse, came in at 49.8 for January, NBS data showed earlier this month.

A figure above 50 signals expansion, while anything below indicates contraction. The January reading marked the first contraction in more than two years.

The drop in consumer inflation was driven by tumbling international crude prices and warmer January temperatures than average, causing vegetable, fruit and fish prices to fall, senior NBS analyst Yu Qiumei said in a statement.

But some economists downplayed the deflation concerns, arguing that CPI was distorted by a strong comparison base last year due to the variable timing of the Chinese New Year, which sees consumers rush to buy goods ahead of the holiday.

It falls on February 19 this year, but was on January 31 last year.

“We don’t think this should spark concerns over impending deflation as it is likely to be the low-point for inflation this year,” Julian Evans-Pritchard, an analyst with research firm Capital Economics, said in a report.

“The base effect in food prices will reverse this month, causing inflation to bounce back,” he said, adding CPI was expected to rise 1.7 percent in February.