China's July Consumer Inflation Falls to 10-Month Low

China's consumer price inflation fell to a 10-month low of 6.3 percent in July from 7.1 percent in June as last year's surge in the cost of food continued to unwind, the government said on Tuesday.

China, Chinese Flag
China, Chinese Flag

The figure marks the third consecutive monthly drop in consumer inflation, which hit a 12-year high of 8.7 percent in February.

The reading was below market forecasts of 6.5 percent and will come as a relief to policy makers after wholesale prices on Monday rose to a 12-year high of 10 percent in the 12 months ending in July.

"The deceleration in CPI inflation is an encouraging development for the authorities as they try to shift their focus to growth from inflation," said Angus To with BNP Paribas in Hong Kong.

Non-food inflation remained well contained, with prices up 2.1 percent in July from a year earlier, compared with 1.9 percent rate in the year to June.

However, investors took scant comfort from the better-than-expected outcome. The main Shanghai stock market index rose from its lows but was down 0.61 percent in mid-morning. The index is now 60 percent below last October's peak.

Economists, like the market, fret that pipeline price pressures will either feed through eventually to consumer inflation or will erode corporate profits, jeopardising investment and job growth.

Ben Simpfendorfer, an economist with Royal Bank of Scotland in Hong Kong, said the drop in inflation reflected a high base of comparison last year and did not mean the authorities could lower their guard.

"There's a temptation to read this as a sign that inflation is easing, but in fact inflation pressure is still firm," he said. "Yesterday's high producer price inflation was a warning that inflation pressures remain."

Food prices, which make up a third of the consumer basket, rose 14.4 percent in July from a year earlier, compared with an increase of 17.3 percent in the 12 months to June, the National Bureau of Statistics said.

The CPI in the first seven months rose 7.7 percent from the same period a year earlier, making it all but certain that the government will fail to hit its goal of keeping inflation for the whole year below 4.8 percent, which was the rate in 2007.

Beijing recently shifted its policy priority from preventing the economy from overheating to safeguarding growth, which slowed to 10.4 percent in the first half from 11.9 percent for the whole of 2007.

With the central bank struggling to cope with excess cash sloshing around the economy, Simpfendorfer said monetary policy would stay on hold for the rest of the year. The central bank has not changed interest rates since December.

But Zhao Qingming, an analyst at China Construction Bank in Beijing, said he expected the central bank to relax its credit controls to give the economy a shot in the arm.

"It's obvious that the CPI will trend down for the rest of the year," Zhao said.