Chinese inflation exceeds 3% target

Chinese inflation has exceeded the 3 per cent target set by the government for the year, at a time when wage pressures in the economy are intensifying, but other indicators released on Friday suggest that growth in China is slowing.

Consumer price inflation rose to 3.1 per cent in May from 2.8 per cent the month before, while factory gate inflation was also higher at 7.1 per cent, up from 6.8 per cent.

However, industrial production dropped to a year-on-year increase of 16.5 per cent in May, against a 17.8 per cent increase the month before.

That suggested that some of the government’s tightening measures, including a clampdown on property speculation, are beginning to have an effect. If these trends continue, it would put the authorities in a delicate position of facing rising inflation but a slowing economy.

“Falling growth and rising prices places the government in a policy quandary,” said Tom Orlik, economist at Stone & McCarthy in Beijing. “Falling growth argues for policy continuity. Rising inflation suggests accelerating the tightening schedule.”

However, he added that “we expect a slowdown in external demand and domestic investment in the second half of the year to take the heat out of China’s labour markets, and consumer price increases”.

As well as industrial production, there were other indications that activity is slowing. The increase in urban fixed asset investment fell for the third straight month to 25.9 per cent year-to-date, down from 26.1 per cent the month before.

The increase in the M2 measure of money supply also moderated again to 21 per cent year-on-year from 21.5 per cent, while retail sales were largely flat at an 18.7 per cent increase.

“Although year-on-year CPI and PPI inflation continued to accelerate, we believe underlying inflationary pressures are dissipating quickly which is consistent with the slowdown in activity growth,” said Yu Song and Helen Qiao at Goldman Sachs.

Few economists expect the inflation numbers to prompt an abrupt increase in interest rates. “We don’t expect a knee-jerk reaction from policymakers. Interest rates won’t be hiked until 4Q10,” said Ting Lu at Bank of America-Merrill Lynch.