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Producer prices down but optimism for deflation

SHANGHAI'S producer prices continued to drop in May but an analyst said that deflation may end in two or three months after the city's economy strengthens.

Shanghai's Producer Price Index, the main gauge of factory-gate inflation, fell 7.8 percent last month from a year earlier, the Shanghai Statistics Bureau said today.

The drop, the sixth retreat in a row, followed declines of 7.4 percent in April, 6.8 percent in March and 6.5 percent in both February and January.

The cost of fuel energy lost 28.3 percent, becoming the sector registering the biggest fall among raw materials for production. It was followed by non-ferrous metals which withdrew 25 percent and ferrous metals which fell 18.6 percent.

"The negative PPI reflected the dwindling demand since the end of last year after the outbreak of the global financial crisis. The falling figure in May was also partly due to the high base at the same period of last year," said Wang Zehua, an analyst with the bureau.

"The pressure of deflation may subside in the coming two or three months when the city's economy shows more signs of recovery which in turn shores up the demand."

Shanghai's economic growth tailed off to 3.1 percent in the first quarter of this year after posting a 9.7 percent gain in 2008, its first single-digit growth in 17 years.

But recent key economic data have shown signs of improvement.

The drop in the city's industrial production narrowed to 2.1 percent on an annual basis from the drops of 5.2 percent in April and 7.1 percent in March.

Retail sales and urban fixed-asset investment remained robust, both attaching double-digit growth in May.

Investment in the industrial sector through May entered expansionary territory for the first time this year, edging up 0.1 percent compared with a year ago.

Shanghai's Consumer Price Index, the main gauge of inflation. also scaled back to a drop of 1.2 percent last month from the fall of 1.4 percent in April.

The biggest obstacle to Shanghai's economic expansion was the weak external demand. The city's exports last month dived 29.7 percent year on year, further sliding from the drop of 26.2 percent a month earlier.


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