No fear of deflation

Updated: 2012-08-10 08:08

(China Daily)

  Print Mail Large Medium  Small 分享按钮 0

With the annual consumer inflation falling to a 30-month low of 1.8 percent in July, some experts have urged the government to take precautionary steps against deflation.

It's too early, however, to discuss deflation because the possibility of inflation rebounding in the coming months remains high. The market has been anticipating an interest rate cut or reserve requirement ratio adjustment for the banks after the news that inflation continued to decline.

Indeed, as growth slows, the authorities may cut the interest rate or adjust the reserve requirement ratio to anchor the economy. Low inflation has rid policymakers of the worry that easing monetary policy could lead to rising prices.

But prices are yet to get serious enough to indicate a deflationary cycle. The low reading in July is partly attributable to the base effect as last July saw the three-year high inflation of 6.5 percent.

The month-on-month inflation, after all, rose by 0.1 percent in July, and it better reflects the short-term trend and shows the momentum of price rise is not as weak as indicated by the year-on-year figure.

Volatile food prices, meanwhile, add to the price uncertainties in the coming quarters.

For example, the natural disasters in the past weeks, especially the floods in the northern region, have caused vegetable prices to soar. Another major natural disaster could send food prices surging in the rest of the year.

Rising prices of some commodities, such as soy bean and petroleum, will also have a knock-on effect on food and other products, such as cooking oil and pork, which are major components of the official inflation-gauging basket.

The expected easier economic policies aimed at boosting growth could also push prices up.

Policymakers face growth pressures both from domestic and international markets. The evolving European crisis is still a strong headwind for the Chinese economy and the internal growth momentum remains sluggish. The industrial output growth weakened to 9.2 percent year-on-year in July, the lowest since May 2009, and mediocre retail sales and fixed-asset investment performance in July also disappointed the market.

In such a situation, policymakers are set to take measures to stabilize growth, which will fuel inflation growth.

Of course, inflation will not rise sharply in the coming months because economic activities remain tepid. But the possibility that inflation may gradually increase is high, shaking off concerns over deflation.