China Inflation


Inflation continues to rise in 2011

In February, consumer prices rose 4.9% over the same month the year before, matching the 4.9% tallied in January, but exceeding market expectations of a 4.8% increase. Moreover, annual average inflation increased further to 3.8% in February (January: 3.6%), approaching the 4.0% target set by the government for 2011. As was the case in previous months, the main drivers behind the increase were higher food prices, which rose 11.0% over February 2010 (January: +10.6% yoy). Non-food prices mitigated the increase, rising 2.3% (January: +2.4% yoy), while housing inflation eased slightly from 6.4% in January to 6.1% in February. Inflation continues to increase despite authorities' ongoing efforts to stem price pressures raising doubts about the country's ability to tackle price increases. In response to these concerns, premier Wen Jiabao identified price stability as the top priority of macroeconomic policy for this year, signalling that further monetary tightening may be in the pipeline. Meanwhile, producer price inflation continued to trend upwards, reaching the highest level since October 2008, and raising concerns that higher producer prices will nudge consumer prices higher in the near term. In February, producer price index (PPI) added 7.2% over the same month last year, well above both January's 6.6% rise and the 7.0% anticipated by market analysts. In February, money supply (M2) grew 15.7% year-on-year while new yuan loans stood at RMB 535.6 billion, both pointing to a moderation compared with the 17.2% yoy and RMB 1.0 trillion registered in the previous month. Moreover, both indicators came in below market expectations (18.0% yoy, RMB 650 billion), confirming that policy makers' efforts to keep credit growth in check, have begun to bear some fruit, after the aggressive tightening pursued in recent months.

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