China June inflation cools to 2.2%, gives scope for monetary easing

China’s annual consumer inflation cooled to 2.2 percent in June, from May’s 3.0 percent, official data showed on Monday, giving Beijing more scope to ease monetary policy to support growth without stoking upward price pressures.

Economists polled by Reuters had forecast inflation to ease to 2.3 percent in June.

The National Bureau of Statistics said China’s producer price index dropped 2.1 percent last month from a year earlier, sharper than forecasts for a 1.9 percent decline.

Inflation is no longer an imminent threat to China," said Dongming Xie, an economist at OCBC Bank in Singapore.

[caption id=“attachment_371701” align=“alignleft” width=“380”]  The National Bureau of Statistics said China’s producer price index dropped 2.1 percent last month from a year earlier, sharper than forecasts for a 1.9 percent decline. Reuters[/caption]

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“We expect July CPI to fall below 2 percent. August and September will be important months to monitor from an inflation perspective. If prices fall too fast, fuelling deflationary expectations, China is likely to cut interest rates further.”

The drop in PPI, the fourth straight month of producer price deflation, helps underpin expectations among economists that consumer inflation in the world’s second biggest economy will ease further in the months ahead.

Falling PPI also underlines the risk that producer prices are easing not just because of base effects from declining commodity and other input prices versus a year ago, but because final demand for China’s factory output - particularly from foreign customers - is declining as the global economy weakens.

The point appears not to be lost on Premier Wen Jiabao, who was quoted by the official Xinhua news agency on Sunday as saying more aggressive efforts were needed to support growth - albeit within the “fine-tuning” policy mantra adopted by officials since the autumn of last year.

“China’s current economic situation is generally stable, but it still faces relatively huge downward pressure. We should increase the strength of policy fine-tuning,” the official Xinhua news agency quoted Wen as saying during a trip to the eastern province of Jiangsu.

“China should maintain its proactive fiscal policy, focusing particularly on improving the structural tax cut policies, while continuing to implement prudent monetary policy to effectively settle the structural contradiction between the supply and demand of credit,” Wen said.

China’s central bank unexpectedly cut benchmark interest rates last week for the second time in a matter of weeks in a bid to bolster growth. It has also lowered banks’ required reserves in three 50 basis point steps since November 2011, freeing an estimated 1.2 trillion yuan for lending.

The inflation report kicks off a week of major data releases for the Chinese economy, culminating on Friday with the scheduled publication of GDP growth data for the second quarter of the year.

The benchmark Reuters poll forecasts China’s economy grew 7.6 percent in the second quarter versus the same three months a year ago. That would mark the slowest quarter of expansion since the three months to March 2009, at the depths of the global financial crisis.

Chinese GDP grew 8.1 percent in Q1 2012 versus Q1 2011.

Reuters