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China's Inflation Slows in June

China's Inflation Slows in June

07/09/2014

BEIJING--Inflationary pressure in June eased slightly in China, giving policy makers more room to employ targeted fiscal and monetary measures in their bid to prop up economic growth.

China's consumer-price index rose 2.3% in June from a year earlier compared with a 2.5% year-over-year rise in May, the National Bureau of Statistics said Wednesday. The gauge of inflation remains below Beijing's annual target of 3.5% year for 2014 and slightly undershot the median 2.4% gain forecast by a poll of 21 economists by The Wall Street Journal.

"Inflation isn't really going anywhere," said HSBC analyst John Chua. "This probably gives Beijing more policy flexibility. They don't worry about the economy running at full capacity."

The world's second-largest economy saw its slowest growth in 18 months during the first quarter, expanding by 7.4% year on year, compared with 7.7% in the fourth quarter of 2013.

That sparked a broad-based effort to prop up output to meet the annual growth target of 7.5%, including expanded spending on rail and social housing, tax breaks for small companies and more credit targeted at farmers and entrepreneurs. China's economy still remains under strong government control two decades after reforms liberalizing the economy were enacted, and targets are taken seriously.

Looking ahead to the third quarter, some have called for a broad-based cut in the reserve requirement ratio, the amount of funds that banks must keep in reserve with the central bank, as a way of increasing credit. "I think there should be a cut in RRR for a least 60% of the banks in China in the early part of 3Q," said ANZ economist Liu Ligang.

Despite persistent downward price pressure on construction materials, and measured declines in the price of pork and vegetables, other commodities such as fruit and some metals have seen price increases recently.

Food price rises had a significant impact on June's CPI figure, said PNC Financial Services Group economist Bill Adams. Prices of manufactured goods in the consumer basket rose modestly. And the cost of labor-intensive services rose much more rapidly, including a 7.3% year-over-year increase in home services and repairs, although their share in the Chinese consumer basket is small, he added.

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