OREANDA-NEWS. March 11, 2014. China's consumer price index (CPI), a main gauge of inflation, increased 2 percent year on year in February, marking easing inflationary pressure since the end of last year, official data showed.
 
The growth rate was down from 2.5 percent in the previous month and appeared to be the lowest level since February 2013, according to figures from the National Bureau of Statistics (NBS).
 
The slowed CPI increase, in line with market expectations, was mainly attributed to the mild growth of food prices, which account for nearly one-third of the weighting in the calculation of China's CPI.
 
Analysts predicted mild inflation would be sustained for several months amid economic downward pressure and weak global commodity prices.
 
EASED INFLATION
 
In breakdown, inflation rose 2.1 percent in cities and 1.7 percent in rural areas from the same period of last year, the NBS data showed.
 
Food prices rose 2.7 percent year on year and contributed to the 0.9-percentage-point increase in February's CPI growth.
 
Prices of fruit, aquatic products, vegetables and grain went up year on year in February, with fruit price seeing the largest increase of 19.7 percent.
 
Bucking the trend, prices of poultry and meat dropped from the same period of last year with the price of pork, China's staple meat, down 8.7 percent.
 
Prices of non-food products climbed 1.6 percent from a year ago, propped up by prices of household services and processing and maintenance services, Chinese medicine, communication tools, tours and outings, and rent.
 
On a month-to-month basis, CPI edged up 0.5 percent last month from January, while food prices rose 1.7 percent, down from 3.7 percent in January, and prices of non-food remained flat.
 
Lu Ting, economist with Bank of America Merrill Lynch, said the major factor driving the sharp decline in food inflation was the distortion of the Chinese Lunar New Year holiday, which fell at the end of January and ended in early February, along with the government frugality campaign and abundant pork supply.
 
He thought 2.3 percent was a more appropriate reading for the average CPI in the Jan.-Feb. period.
 
China's inflation has slowed it pace for four straight months, as the country's economic growth decelerated amid industrial restructuring and furthering reform.
 
Tang Jianwei, researcher from the Bank of Communications, said the mild CPI figure was also affected by the slowing economic growth in the last quarter of 2013 and tightened liquidity.
 
In the fourth quarter of 2013, China's economy grew by 7.7 percent year on year, the NBS data showed.
 
On Sunday, the bureau also revealed that the producer price index (PPI), which measures inflation at the wholesale level, contracted 2 percent year on year in February after a 1.6-percent decline in January.
 
IMPROVED OUTLOOK
 
Given the current economic climate, Lu predicted inflation in the next couple of months would remain at around 2.3 percent to 2.5 percent, way below the 3.5-percent cap set by the government.
 
Echoing his words, Lin Qiaoji, analyst from ABC International, forecasted the CPI would be held below 2.5 percent in the next few months.
 
The subdued inflation, while ensuring people's wellbeing, will also be supportive for the central government implementing macroeconomic policies, especially monetary policies.
 
"A couple of months ago, the market was deeply worried that the central bank would be forced to tighten liquidity if CPI approaches the official cap," Lu said. "Now, the low inflation could be good news for markets as monetary tightening is definitely not justified."
 
In addition, the PPI, dragged down by the dampening domestic demand amid economic slowing, is also likely to improve in the next few months.
 
Lin predicted the contracting PPI to be relieved as new orders from the United States and European market would stimulate the sluggish production.
 
China's PPI has been in deflationary territory for 24 consecutive months, the longest drop since the 1990s, according to the NBS.