China’s Inflation Falls 1.6%

China’s consumer prices fell for the first time since 2002 after commodity costs declined, stoking concern that deflation will undermine efforts to revive the world’s third-biggest economy., Bloomberg 3/9/2009 8:20:51 PM

Consumer prices dropped 1.6 percent in February from a year earlier, the statistics bureau said today, after gaining 1 percent in January. The median estimate in a Bloomberg News survey of 10 economists was for a 1 percent decline. Producer prices fell 4.5 percent, the most in a decade, after a 3.3 percent decline.

The drop in prices raises the risk that deflation will become entrenched, squeezing company margins, prompting wage cuts and eroding consumer demand. Premier Wen Jiabao is relying on a 4 trillion yuan ($585 billion) stimulus package to spark a recovery after a collapse in exports dragged economic growth to the weakest pace in seven years.

Inflation climbed to the highest in more than a decade in February 2008 as a week-long Lunar New Year holiday boosted spending and blizzards disrupted food supplies. This year, the holiday was in January.

Metal and oil prices have fallen because of weaker demand caused by the global economic slump. China’s food prices, which account for about a third of the consumer-price index, have also cooled.

Manufacturers cutting prices in China include Volkswagen AG, which reduced last month the prices of some locally made models by as much as 12 percent amid tumbling demand. House prices in 70 cities fell 1.2 percent in February from a year earlier, the biggest drop since data began in 2005, the government said today.

China’s economy, which expanded 6.8 percent in the fourth quarter, may grow 6.7 percent in 2009, the smallest gain in almost two decades, according to the International Monetary Fund.

A trend toward global deflation is becoming more obvious as the international financial crisis keeps spreading, Premier Wen said March 5 in his annual speech to China’s parliament, as he reaffirmed the nation’s 8 percent growth target for this year.

Temporary deflation in China may spur consumer spending and cut production costs, according to UBS’s Wang. The current low-price environment has also offered an opportunity for the government to raise controlled prices such as utility prices including electricity and water,” she said.

China isn’t yet facing typical” deflation, where falling prices are accompanied by shrinking loans and money supply and an economic recession, central bank vice governor Yi Gang said, according to the state-run Xinhua News Agency.

China’s banks extended 1.6 trillion yuan of loans in January, double the record set a year earlier, after the government removed quotas limiting lending. Money supply expanded at the fastest pace in more than a year.

China’s Inflation Falls 1.6%