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

Moderate inflation can be a boon to consumption as it encourages consumers to buy before prices go up/FILE

Moderate inflation can be a boon to consumption as it encourages consumers to buy before prices go up/FILE

BEIJING, China, Feb 10 – China’s inflation plunged to 0.8 percent in January, its lowest level for more than five years, 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.

The drop in CPI 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.

Analysts warned of deflation in the Chinese economy, a key driver of global growth, and called for more economy-boosted measures by Beijing.

“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 feel the pain of 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.

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– Rate cuts -“Consumption played a key role in stabilising economic growth last year. If consumption cools down while investment is hard to rebound, it is set to add woes to the economy,” 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 showed 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) released by the NBS earlier this month came in at 49.8 for January. A figure above 50 signals expansion, while anything below indicates contraction.

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It was its first contraction reading in more than two years.

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