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Consumer, production prices continue to drop

CHINA'S consumer and production prices continued to decrease in May as expected, which allowed the central bank to retain low interest rates.

Analysts anticipate the deflation will extend into August and some have even issued early warnings of inflation because of soaring prices in international markets.

The Consumer Price Index, the main gauge of inflation, fell 1.4 percent in May from a year earlier, the National Bureau of Statistics said today.

It was the fourth consecutive monthly decline but the pace of contraction narrowed a little from 1.5 percent in April, compared with a 1.2-percent drop in March, setting a trend towards stabilization.

The Producer Price Index, the chief measure of factory-gate inflation, slid further to a record low of 7.2 percent in May from drops of 6.6 percent in April and 6 percent in March on an annual basis. But compared with a month earlier, the May PPI actually increased 0.1 percent.

The CPI posted a combined loss of 0.9 percent in the first five months while the PPI contracted 5.5 percent during the period.

"We expect China will be stuck with deflation until August. In September, the CPI may enter the positive territory and may climb above 2 percent in November or December," said Wei Fengchun, an analyst at China Securities Co.

"It will allow the central bank to keep the interest rates at a relatively low level to stimulate lending and thus boost the economy."

China has cut interest rates five times since September to encourage economic growth amid the global recession. This helped banks in China issue a combined 5.17 trillion yuan (US$757 billion) in new yuan lending from January to April, up 3.37 trillion yuan from a year earlier.

"The current contraction in the CPI and PPI supports China's easing monetary policy," said Li Maoyu, an analyst at Changjiang Securities Co, who expects there will be no major changes in China's loose monetary approach.

He said the deeper decrease of May PPI was largely due to the base effect and producer prices may hit bottom in the third quarter of this year.

Instead of worries about deflation, which may hurt consumer spending as people wait for prices to fall further, some analysts have issued warnings of inflation in the near future.

Fan Jianping, the chief economist with the State Information Center, a research unit under the National Development and Reform Commission, said the risk of inflation had increased "significantly" in recent months.

"The prices of raw materials on the global market have seen big jumps recently while the ample liquidity in the home market could breed another round of inflation, possibly next year," said Fan, who suggested the government should take preemptive measures.

The price of crude oil has climbed to above US$70 a barrel on the New York Mercantile Exchange, compared with US$35 a barrel in February. The prices of copper and platinum have also risen more than 35 percent and 19 percent respectively since the beginning of the year.


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