April 9, 2012

Food Drives China Consumer Prices Higher

Inflation increase may drive change in policy on stimulus

Food prices drove consumers in China to pay more than expected in March, and that in turn could effect a change in government policy on stimulus.

Bloomberg reported Monday that according to China’s National Bureau of Statistics, consumer prices were up 3.6% from a year ago. That is more of an increase than was expected by economists, whose poll responses averaged 3.4%. Food prices drove the increase, coming in at 7.5% higher in March than in February.

“The upside surprise in today’s CPI reading is likely to raise concerns about a possible rebound in inflationary pressures among policy makers,” Song Yu, a Beijing-based economist with Goldman Sachs Group, was quoted saying.

Citing Goldman’s observations on the rising supply of loans and news reports on the government easing restrictions on banks’ lending capacity, Song added, “The data could limit the magnitude of the policy loosening that likely started in March.”

Although price increases did stay below the government target of 4% for the second month, officials will need to remain watchful lest inflation rise. Premier Wen Jiabao said last week that the government will work to “prevent a rebound” in consumer prices and manage inflationary expectations.

According to Yao Wei, a Hong Kong-based economist with Societe Generale, the data will make it more difficult to properly time action on monetary policy with a slowdown in economic growth. She said that inflation could decelerate this quarter because of higher bases of comparison with the same months in 2011, and would not rule out an April cut in the required reserve ratio, although she added that a cut in interest rates was “extremely unlikely.”

Song said in the report that “underlying inflationary pressures remain modest” and that Goldman Sachs expects price gains to “trend down in the coming months.”

Reprints Discuss this story
This is where the comments go.