China's CPI Up 4.5%, PPI Up 0.7% in January

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February 9, 2012 8:05 AM EST

China's inflation unexpectedly rebounded in January mainly due to gains in food prices and a weeklong holiday.

Though this does not change the broader downward trend in inflation and provides room for Beijing to stimulate its economy if the Euro area experiences a sharp recession. It does support economists' view that Beijing will not put in place aggressive stimulus packages as it aims for a smooth leadership transition this year.

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China's consumer price index, a main gauge of inflation, rose 4.5 percent in January compared to a year earlier, data from the National Bureau of Statistics showed Thursday. Economists surveyed by Thomson Reuters were expecting a rise of 4.1 percent. However, Thursday's figure is still well below the 2011 average of 5.4 percent.

The producer price index, which reflects inflation pressure at the wholesale level, rose 0.7 percent in January from a year earlier, better than economists' median forecast of a 0.8 percent gain. That's also its lowest level since November 2009.

"The threat of inflation has receded somewhat," said Ravi Ramamurti, director of the Center for Emerging Markets at Northeastern University.

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Despite the slowing of CPI in recent months from the mid-2011 peak at 6.5 percent, it was still up 5.4 percent in 2011, well above the government's full-year inflation control target of four percent.

Breathing Room

"We expect the government to meet its (CPI) target this year," said Victoria Lai, an economist at the Economist Intelligence Unit.

Lai expects the effect of last year's tightening monetary policy to continue to push the CPI and PPI down in 2012 to an average of 3.6 percent and 2.2 percent, respectively.

"The decelerating trend in inflation will give policymakers a bit more space to make further adjustments in monetary policy," Lai said.

The latest Reuters poll showed economists expect China's central bank to cut banks' required reserves by two percentage points in 2012, or four cuts of 0.5 percentage points each.

Cooling the overheating economy has been the big story in 2011 for China, as it battled high inflation after jump-starting the economic recovery in 2008 with a four-trillion yuan ($634.5 billion) stimulus package.

"China's leaders are trying to figure out how fast the country can grow without taking inflation above 4 percent," Ramamurti added. "It will take trial and error to achieve the perfect balance."

2012: Leadership Transition

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