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Rates safe, as prices continue to fall

CHINA'S consumer and producer prices continued their fall in May as expected, allowing banks to keep interest rates low and provide an economic booster shot.

But analysts said they anticipate deflationary pressure will subside in the second half of this year, and some even warned of inflation ahead because of soaring commodity prices in the global market.

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

It was the fourth consecutive monthly decline, but the contraction narrowed slightly from 1.5 percent in April and compared with a 1.2 percent drop the previous month.

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.

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

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

"It allows the central bank to keep interest rates at a relatively low level to stimulate lending and thus boost the economy," Wei said.

China has cut interest rates five times since September to shore up economic growth amid the global recession. The moves helped the nation's banks issue a combined 5.17 trillion yuan (US$757 billion) in new yuan lending in the first five months, up 3.37 trillion yuan from a year earlier.

"The current contraction in the CPI and PPI supports China's easier monetary policy," said Li Maoyu, an analyst at Changjiang Securities Co.

He said May's substantial decline in producer prices was mainly due to a large base amount the year before and that it could bottom out in the third quarter.

Instead of worries about deflation, which would hurt consumer spending if people wait for prices to fall further, some analysts have issued warnings of future inflation.

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

"The prices of raw materials on the global market have experienced big jumps recently while the ample liquidity in the domestic market could breed another round of inflation, possibly next year," Fan said.

The price of crude oil has climbed above US$70 a barrel on the New York Mercantile Exchange, compared with just US$35 a barrel in February. The price of copper has risen more than 35 percent since the beginning of this year.


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