|Citizens select goods at a supermarket in Hefei, capital of east China's Anhui Province, Aug. 9, 2012. China's Consumer Price Index (CPI), a key gauge of inflation, grew by 1.8 percent in July year on year, the slowest pace since February 2010, the National Bureau of Statistics (NBS) announced on Thursday. The rate was 0.4 percentage points lower than the figure in June. (Xinhua/Du Yu)
BEIJING, Aug. 9 (Xinhua) -- China's consumer inflation eased to its lowest rate in two and a half years in July, giving the government more leeway to loosen credit to spur the slowing economy.
The consumer price index (CPI), a key gauge of inflation, grew to 1.8 percent year on year in July, the slowest rate since February 2010, the National Bureau of Statistics (NBS) announced Thursday.
The rate was 0.4 percentage points lower than the figure for June.
The Producer Price Index (PPI), a main gauge of inflation at the wholesale level, fell 2.9 percent in July from a year earlier.
The easing inflation is believed to be a result of the base effect. The CPI growth rate hit a 37-month high of 6.5 percent in July last year before gradually retreating as China's economy slowed for eight quarters in a row.
Food prices, which account for nearly one-third of the prices used to calculate China's CPI, edged up 2.4 percent in July from a year ago, down from a growth of 3.8 percent in June.
Surging vegetable prices were the driving force for the CPI's growth. Rain and flooding affected vegetable production in many places during the peak supply season, pushing up vegetable prices by eight percent.
Pork prices fell 18.7 percent, dragging down CPI growth by 0.71 percentage points, NBS said.
Zhang Liqun, a researcher with the Development Research Center under the State Council, said abundant domestic agricultural production has helped stabilize prices. He called for more attention to be paid to severe ongoing droughts in the United States that are expected to impact China's edible oil and grain prices.
Although the falling inflation rate was largely attributed to easing food prices, Zhang said it actually reflects shrinking social demand amid the slowing economy.
Qu Hongbin, chief economist at HSBC China and co-head of Asian Economic Research at HSBC, said the data suggests that China's real economy, especially industrial enterprises, are facing increasing deflationary pressure.
"The decline of the PPI has highlighted the grim facts of sluggish market demand, shrinking business orders and continuing destocking," he said.
Dwindling orders from Europe and other trade partners have sapped China's exports and, combined with a cooling property sector, slowed the country's economic growth rate to 7.6 percent in the second quarter, the lowest level since the first quarter of 2009.
At a meeting of the Political Bureau of the Communist Party of China (CPC) Central Committee that was presided over by President Hu Jintao on July 31, authorities reaffirmed that they will prioritize stable economic growth and adhere to a proactive fiscal policy and prudent monetary policy to weather current economic hardships.
To boost growth, the government has loosened the monetary supply, cut taxes for small businesses and encouraged private businesses to invest in sectors previously closed to them.
The central bank has cut its lending and deposit rates twice, as well as lowered the amount of funds that banks must keep in reserve.
Since the easing inflation rate offers more room for monetary expansion, Liu Ligang, an economist with ANZ National Bank Limited, said the central bank will lower the reserve requirement ratio in August, as well as another time within the year.
But he did not take the deflation risk seriously, citing his belief that consumer prices are likely to rebound slightly in the following months due to a waning base effect.
According to Wang Jun, a researcher at the China Center for International Economic Exchange, climbing costs will cause the CPI to surpass 2 percent before long.
The central bank warned in a quarterly monetary policy report that consumer prices could bounce back after August on the back of rising costs for labor and resource-intensive products such as electricity, water and natural gas.
Despite expectations for a slight price rebound, analysts generally agreed that the annual inflation rate will remain below three percent, well within the government's target of four percent for the year.
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