Deflation fears: China's Jan inflation comes in at 0.8%, hits 5-year low

Beijing: China’s inflation plunged to a more than five-year low of 0.8 percent in January, official data showed today, fuelling fears the world’s second-largest economy is on the brink of a deflationary spiral.

The rise in the consumer price index (CPI) was sharply down from the 1.5 percent recorded in December, and was the weakest since 0.6 percent recorded in November 2009, according to the National Bureau of Statistics.

It was also short of the median forecast of 1.0 percent in a survey of analysts by Bloomberg News and came despite a surprise interest rate cut in November.

Moderate inflation can be a boon to consumption as it encourages consumers to buy before prices go up, while falling prices encourage shoppers to delay purchases and companies to put off investment, both of which can hurt growth.

Analysts warned of deflation in China, a key driver of global expansion, and urged Beijing to take more measures to boost the economy.

“The weak inflation profile suggests that the deflation has become a real risk for China, thus paving way for further monetary policy easing,” ANZ economists Liu Ligang and Zhou Hao said in a research note.

Liu Dongliang, an analyst with China Merchants Bank in Shanghai, noted that consumption may have started to be affected by China’s growth slowdown, as services and consumer goods prices slumped last month.

“We should get vigilant about this sign and pay high attention to changes in the job market,” he said in a research note.

“Consumption played a key role in stabilising economic growth last year. If consumption cools down while investment struggles to rebound, the economy will face even more trouble,” he said.

China’s economy grew 7.4 percent in 2014, its weakest for almost a quarter of a century, and slower than the 7.7 percent in 2013.

CPI was 2.0 percent last year, down from 2.6 percent in 2013 and well below the government’s target of about 3.5 percent.

The People’s Bank of China (PBoC) today injected 80 billion yuan (USD 12.8 billion) into the market through reverse repurchase agreements, known as repos, the official Xinhua news agency reported.

The term describes a process by which central banks purchase securities from lenders with an agreement to resell them at future dates.

It is the bank’s sixth such operation this year. The move follows an across-the-board cut last week in the percentage of funds banks must hold in reserve, the first in nearly three years, which was aimed at boosting growth.

AFP