Major inflationary pressure unlikely this year

Consumers buy vegetables at a supermarket in Handan, Hebei Province. (Photo by Hao Qunying/For China Daily)

China is unlikely to face major inflationary pressure this year, despite the consumer price index, a primary barometer of inflation, hitting a 15-month high in May, analysts said on Wednesday.

The nation's CPI rose for the third consecutive month to 2.7 percent year-on-year last month, the highest since March 2018, the National Bureau of Statistics said on Wednesday.

The reading quickened from 2.5 percent for April, as tighter supplies of fruit, pork and vegetables drove up food prices by 7.7 percent year-on-year, the NBS said. Non-food prices saw a mild increase of 1.6 percent over the same period.

Fruit prices recorded the most notable rise mainly because bad weather hammered supplies, with the price of fresh fruit up 26.7 percent year-on-year in May, the NBS said.

"The food price rise is mainly driven by seasonal and structural factors, rather than an overall imbalance between supply and demand," said Yang Weiyong, an associate professor of economics at the University of International Business and Economics in Beijing.

"Considering that imports can ease structural supply shortages, food prices should not pose continuous inflationary pressure," Yang added, pointing out that fruit prices will fall as more types of fruit mature, and as the country ramps up and diversifies fruit imports.

Given that the inflationary risks of food prices are controllable and that economic downside pressure may weigh on aggregate demand, Yang expects the country to maintain mild inflation this year.

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"CPI is expected to be on an upward trajectory over the whole year. It may peak at around 2.9 percent in September and October, and fall seasonally in November and December," Yang Xiao, a researcher from Kunming, Yunnan province-based Pacific Securities wrote in a note on Tuesday.

The country has set this year's target CPI growth at around 3 percent, while the average CPI growth during the January-May period was 2.2 percent year-on-year.

Despite the overall mild inflation projection, analysts cautioned about the need to monitor the increasing pork prices due to the African swine fever outbreak, which may replace fruit as the major driver of CPI growth later this year.

NBS data also showed that the producer price index, which measures factory gate prices, was up 0.6 percent year-on-year last month, down from 0.9 percent in April.

The decline is in line with the official manufacturing purchasing managers index for May that fell into contraction territory, signaling weakening demand for industrial products and raw materials.

Controllable inflationary pressure, especially the rather low core inflation level that deducts food and energy prices, will give Chinese monetary authorities the room to ease their policy stance for potential worse-case scenarios, said Lu Tingwei, a strategist with State Street Global Advisors, one of the world's largest asset managers.

Some central banks, such as those in Australia, New Zealand and India, have clipped interest rates to offset downside pressure this year, and the market is increasingly speculating that the US Federal Reserve will join them soon.

This provides China with a rather favorable external environment for potential easing measures, while policymakers should still be "cautious" about monetary easing to avoid dangerous asset bubbles and long-term inflationary pressure, said Yang from the UIBE.

Editor: Wang Shixue