China's annual inflation rate accelerated to 4.5 percent in January, well ahead of market expectations and breaking a five-month trend of easing price pressures as consumers ramped up spending during the Chinese Lunar New Year holiday season.
Provided January's jump higher does not turn into a trend, many economists expect inflation in February to soften and continue the pattern through 2012 to likely come in below 4 percent for the year as a whole, leaving China's policy of targeted monetary and fiscal easing intact.
"Since late November, food prices have climbed again, driven by seasonality and holiday demand before Chinese New Year. However, momentum has so far remained within the normal seasonal pattern," UBS analysts wrote in a note to clients.
"On the other hand, non-food inflation kept moderating on slowing growth momentum," they added. "With inflation trending down, we do not expect it to constrain further policy easing in the upcoming quarters."
Economists say the seasonal factor makes the January data particularly hard to read given that food prices, comprising roughly a third of China's consumer price index, typically rise ahead of and into the week-long official holiday.
The distorting impact of the Lunar New Year has led the government to delay the release of factory output, investment and retail sales data for January. It will combine them with February numbers published in March to smooth out the impact.
The central bank has been easing policy gently since the autumn to maintain money supply and credit creation in a bid to underpin economic growth, which is forecast to slow to 8.2 percent in the first quarter from 8.9 percent in the previous quarter, a Reuters poll shows.
The annual rate of producer price inflation, at 0.7 percent, came in just below forecasts of 0.8 percent, underscoring the potential for downside surprises for corporate China as a deteriorating global backdrop knocks demand for goods from the factories of the world's second-largest economy.
Pro-Growth Policy Focus
China's pro-growth policy stance has replaced fighting inflation as the most urgent priority against that uncertain global outlook, but Chinese officials still warn against complacency on consumer prices.
A near-term upside risk to CPI could come from rising fuel prices after China on Wednesday raised the ceiling for retail prices of gasoline and diesel by 3 to 4 percent.
It was the first hike in 10 months and a move that lifts prices to record highs.
The People's Bank of China cut banks' reserve requirements for the first time in three years in November. More reserve ratio cuts are expected in coming months.
A Reuters poll conducted last month showed the central bank may cut the reserve ratio by a total of 200 bps throughout 2012 to 19 percent.
Most analysts seem to be sticking to their forecasts so far and few believe the central bank will cut interest rates this year, with annual inflation staying stubbornly higher than the one-year deposit rate of 3.5 percent.
China's leaders are aiming for a minimum rate of economic growth of 7.5 percent this year and annual inflation near 4 percent, sources familiar with government plans told Reuters last month.