CHINA / Foreign Media on China
Inflation unexpectedly slows
By Nerys Avery (Bloomberg)
Updated: 2006-11-13 15:05
Inflation in China, the world's fastest-growing major economy,
unexpectedly slowed in October as the cost of food increased at a slower
pace.
The consumer price index advanced 1.4 percent from a year earlier after
rising 1.5 percent in September, the Beijing-based National Bureau of
Statistics said in a statement today. That's less than the 1.6 percent
median forecast in a Bloomberg News survey of 16 economists.
Central bank Governor Zhou Xiaochuan, who raised lending rates twice this
year partly to slow investment growth, last week said excess
manufacturing capacity in some industries is helping contain prices. With
a surge in spending on factories and real estate also cooling, the bank
may hold off on raising interest rates further until next year.
"If the government does raise interest rates it will be to curb
investment rather than because of any worries about inflation," said
Leslie Khoo, an economist at Forecast Singapore Pte. "Inflation is likely
to remain well behaved."
Goldman Sachs Group Inc. economists last month trimmed estimates for
inflation this year and next, citing softening global commodity prices,
and said they no longer expect the central bank to raise interest rates
again this year.
The People's Bank of China raised lending rates on Aug. 18 for the second
time in four months to slow bank lending and bring investment under
control. China has the fourth-lowest inflation rate among 16 Asian
economies tracked by Bloomberg.
Food Costs
Zhou has also sought to limit increases in money supply to stave off
inflation and restrain funding for investment projects. M2, the broadest
measure of money supply, grew at the slowest pace in 14 months in
September after reaching a two-year high in January, as the central bank
sold bonds and forced banks to set aside more money as reserves.
"On the one hand, we have expansionary money supply, however inflation is
low," he told reporters in Frankfurt on Nov. 10. "Chinese manufacturers
have overcapacity in some sectors so competition brings the price down."
Gains in the cost of food, which accounts for about a third of the basket
of goods that is used to compile the consumer price index, eased for the
first month in four. Food costs climbed 2.2 percent, slowing from
September's 2.4 percent gain, as vegetable prices fell. Grain prices rose
for an 11th straight month, climbing 3.7 percent after increasing 3.4
percent in September.
"Food is what drives inflation because it has such a heavy weighting in
the index," said Kent Yau, deputy head of research at Core
Pacific-Yamaichi International in Hong Kong. "Other prices have been
quite stable, and that should provide room for the government to keep
liberalizing energy and utility charges."
Pricing Reform
Non-food inflation last month eased to 1 percent from a year earlier, the
slowest pace since April, as water, electricity and other household
utility costs posted the smallest gain in almost two years.
Over the past two years, Premier Wen Jiabao took advantage of slower food
price increases and falling consumer goods costs to raise caps on fuel
and utility charges, to better reflect international oil prices and to
improve the use of resources.
Most water companies in China are running at a loss, natural gas sells
for half the international price and fuel costs are not aligned with
overseas markets, the World Bank said in February. The price of
electricity in Shanghai during peak hours is less than half of what
households in New York pay.
Producer Costs
Pressure on prices from higher commodity and oil costs is also easing.
Producer-price inflation unexpectedly slowed in October, as gains in the
cost of fuel and excavation products including copper and zinc slowed.
The producer price index, which shows the price of goods at the
factory-gate, climbed 2.9 percent from a year earlier, the government
said last week, the smallest increase since May.
Some economists expect inflation to accelerate next year on rising steel
and cement charges, and as the lagged impact of surging money supply
growth earlier in 2006 feeds through to consumer prices.
Anhui Conch Cement Co., China's largest cement producer, on Oct. 30 said
profit in the third quarter nearly tripled from a year earlier as prices
rose because of soaring demand from the construction industry.
Wheat-growing regions of China, the world's largest producer of the
grain, had as little as 10 percent of normal rainfall last month,
worsening a two-month drought that threatens to boost crop prices.
"Food prices should rise going into the new year, domestic energy prices
are increasing, and midstream heavy industrial prices have already
started to recover," said Jonathan Anderson, chief Asia economic at UBS
AG in Hong Kong. He expects headline consumer price inflation to
accelerate toward 3 percent by the middle of next year.
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