Chinese Inflation Tame

Chinese consumer price inflation held steady in May at 1.8%, the lowest level in a year and a half as falling food prices offset pressure from high oil and commodity prices. In fact Consumer price inflation has been steadily declining from a peak of 5.3% last July and August. Until April, the annual rate of CPI growth had been over 1.8% every month since October 2003. According to the FT the reduction is due to the fact that food prices, which account for an estimated 40 percent of the CPI basket, have eased and that prices for almost all manufactured goods continue to be stuck in deflation.

"Analysts pointed in particular to grain prices, where increases have steadily dropped over the past year from annual rises of more than 30 percent in much of 2004 and which have even started to fall in recent months.

In May, grain prices were 1.6 percent lower than a year earlier, similar to April’s fall of 1.7 percent. However, vegetable prices rose 10.1 percent on the year, data from the National Bureau of Statistics showed."

Basically strong producer price inflation persists (5.9% annual) but overcapacity and strong competition prevents producers from passing on costs.