China's Aug inflation trends point to stabilizing economy

September 8, 2016 10:07 PM EDT

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By Elias Glenn

BEIJING (Reuters) - China's consumer price inflation slowed to its weakest pace in almost a year in August, pulled down by abating food costs, although an encouraging moderation in producer price deflation added to growing evidence of a steadying economy.

Indeed, the broader inflation trends shown in Friday’s data confirm recent signs of a more sure-footed recovery in the world’s second-biggest economy, allowing authorities to resist any fresh monetary easing as they move to curb an unsustainable build up of credit in the financial system.

"The picture is still one of rising price pressures, and for that reason I'd be skeptical of claims this latest drop in inflation is going to increase the likelihood of further monetary easing by the central bank," said Capital Economics' China economist Julian Evans-Pritchard in Singapore.

"What's holding them back from further easing is not inflation concerns, it's concerns of credit risks."

A housing and construction rebound has boosted industries including steel and coal, and while many sectors continue to struggle with overproduction, domestic demand has held up reasonably well, with trade data on Thursday showing a surprising improvement in imports.

The consumer price index (CPI) rose 1.3 percent in August from a year earlier, compared with a 1.8 percent increase in July, the National Bureau of Statistics said on Friday.

That was the slowest pace of inflation since October 2015. Analysts polled by Reuters had expected a 1.7 percent gain.

Consumer inflation has remained well below China's official target of around 3 percent in 2016, despite concerns that severe summer flooding, which has disrupted public infrastructure and agricultural production, would ramp up inflationary pressures.

Food prices were up 1.3 percent in August, compared with a 3.3 percent year-on-year gain in the previous month.

Prices of pork, China's staple meat, rose only 6.4 percent versus a 16.1 percent increase in July.

Importantly, non-food prices showed headline inflation remained stable, rising 1.4 percent, unchanged from July. The Statistics bureau data showed a 4.3 percent year-on-year increase in healthcare costs and a 4.5 percent rise in "other goods and services" were the main drivers.

The producer price index (PPI) dropped 0.8 percent in August from a year earlier, the slowest pace of decline since April 2012.

China factory prices have been falling since March 2012, but a turning point could be on the horizon as the industrial sector improves on the back of a housing recovery, and commodity prices bounce globally.

Analysts expect factory prices to turn positive by the end of the year, which will give a much-needed boost to earnings in the industrial sector and help ease pressures from debt obligations.

"Today's PPI data mirrors the improvement in industrial profitability," said ANZ analyst Raymond Yeung in a note to clients.

Indeed, this trend was backed up by data showing China's imports rose for the first time in nearly two years in August as firms restocked and wholesale inflation expectations rose.

The People's Bank of China has not adjusted interest rates since October 2015, and analysts don't expect any short-term easing steps as focus remains on reduction of industrial overcapacity and stemming credit risks.

"Senior officials have been reiterating the priority of 'supply-side structural reform' and the role of active fiscal policy against the backdrop of capacity reduction and an overheating housing market," said ANZ's Yeung.

"The possibility for further monetary easing has significantly declined."

(Reporting by Elias Glenn; Editing by Shri Navaratnam)

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