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CPI drops, but no deflation forecast

CHINA'S consumer price index fell in February for the first time in six years, another indicator of a weakening economy and a possible signal that interest rate cuts might be on the horizon.

A top state agency denied that the drop indicated a trend toward deflation.

The index dropped 1.6 percent in February from a year ago after rising 1 percent in January, the National Bureau of Statistics said yesterday.

February producer prices dropped 4.5 percent, the most in a decade, after a 3.3 percent slump in January, the bureau said.

Food prices, which make up a third of the consumer basket, fell 1.9 percent from a year earlier, while non-food prices were down 1.2 percent.

Among the individual components, the price of grain was up 4.4 percent year on year while meat and poultry fell 8.8 percent, eggs were down 2.9 percent, fresh vegetables tumbled 9.3 percent. Tobacco and alcohol added 2 percent.

Between January and February, consumer prices were flat, the statistics bureau said.

The main reason for the year-on-year CPI downturn in February was a decrease in global commodities prices against high prices in the comparison period.

The year-earlier prices were inflated because of snowstorms that tightened supplies just before the Spring Festival of 2008, when demand was strong, said Sherman Chan, a Moody's economist.

Economists widely expected a consumer price drop in February. Inflation registered an 8.7 percent year-on-year rise in February 2008.

The statistics bureau said the CPI drop doesn't necessarily mean China is entering a deflationary spiral, a view that was supported by economists.

"Deflation is a price drop driven by a shortage of liquidity. That is not the case in China as we have an ample money supply," the statistics bureau said yesterday on its Website.

Deflation, a persistent drop in prices, can hurt consumption as consumers wait for further price declines, which in return reduces economic activity, squeezes corporate margins and prompts wage cuts.

M2 surges

China's M2, the broadest measure of money supply, grew 18.8 percent in January, topping the government's 17 percent annual growth target.

Banks pumped more than 2.6 trillion yuan (US$380 billion) in new lending into the market to follow government calls to stimulate the economy, creating inflation risks for later this year.

But Ken Peng, a Citibank economist, said that regardless of technical factors, the declines in consumer and producer prices reflect an acute weakness in the economy.

Deflation may not be a scenario for China, but relatively weak prices may continue for months, economists said.

Peng expects a 0.4 percent drop in consumer prices this year on average.

He said the People's Bank of China would be free to cut the one-year benchmark lending rate to 4.23 percent from the current 5.31 percent when the credit boom subsides.


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