Mild inflation creates room to boost economy

A mild rise in consumer inflation and a smaller drop in wholesale prices in June leave ample space for more stabilization measures to prop up growth, economists said.

The consumer price index, a main gauge of inflation, rose 1.9 percent in June year-on-year, and declined by 0.1 percentage points in June compared with the previous month, official data showed, remaining below the annual target set by the central government of around 3 percent.

The producer price index, which measures changes in wholesale prices, registered a 2.6 percent drop year-on-year in June, which is smaller than the 2.8 percent drop in May.

Zhou Jingtong, a senior economist with the Institute of International Finance, a think tank under the Bank of China, attributed the easing CPI to a mild month-on-month increase in food prices, which weigh heavily among goods used to calculate consumer inflation.

Food prices went up 4.6 percent in June, compared with a 5.9 percent increase in the previous month.

However, Zhou said recent heavy floods in southern China will lead to an increase of vegetable and grain prices, which will push up inflation in the short run.

"Floodwaters are expected to bring a major impact to the inflation of July and August, but it would not affect the year-round data," said Zhou, who predicted that the whole year's inflation will remain moderate.

The National Development and Reform Commission, the nation's top pricing regulator, pledged on Sunday to intervene if necessary in areas hardest hit by floods to ensure prices are basically stable.

Eased inflation pressure leaves space to create a relatively relaxed monetary policy in the second half of the year, given that economic pressure is likely to still exist, according to Ren Zeping, chief investment strategist with Guotai Junan Securities Co.

"More growth-stabilizing measures are needed in the third quarter to ensure that the economy will grow within a reasonable range," said Ren, referring to the central government's economic growth target of 6.5 to 7 percent for this year.

Qu Hongbin, chief economist with HSBS Holdings, said in a research note on Sunday that the government should take more measures to boost confidence of entrepreneurs at a time when domestic demand remains weak.

"Although industrial product prices rebounded consecutively in the past couple of months, business confidence remaining in the doldrums would drag down the improvement of PPI," Qu said.