China’s Consumer Prices Fall for Third Month on Food

By Paul Panckhurst and Nipa Piboontanasawat

May 11 (Bloomberg) -- China’s consumer prices fell for a third month on food and commodities, aiding government efforts to boost spending in the world’s third-biggest economy.

Prices dropped 1.5 percent in April from a year earlier, after falling 1.2 percent in March, the statistics bureau said today. The median estimate in a Bloomberg News survey of 21 economists was for a 1.4 percent decline. Producer prices fell 6.6 percent, the most since Bloomberg data began in 1999.

Falling prices may lower costs for businesses and encourage consumers to spend, helping the economy to recover after exports collapsed. The absence of inflation makes it easier for the central bank to maintain its “moderately loose” monetary policy after five interest-rate cuts last year.

“Prices are declining largely because of commodity and food costs and in both cases that’s more positive than negative for the economy,” said Wang Tao, an economist at UBS AG in Beijing. She said easing prices would give consumers extra spending power and lower costs for producers.

The yuan traded at 6.8214 against the dollar as of 11:03 a.m. in Shanghai, from 6.8209 before the number was released.

In April 2008, inflation was 8.5 percent as pork prices soared because of a shortage of the meat, a Chinese staple. The gains encouraged farmers to raise more pigs, leading to an oversupply.

Meat Costs

Now, pork has tumbled close to a level that may trigger purchases by the state to buoy farm incomes, the government says.

Food, which makes up the biggest part of the index, fell 1.3 percent from a year earlier, the statistics bureau said. Pork declined 28.6 percent.

McDonald’s Corp. is among companies to have cut prices in China this year.

“The sharp rise in food prices in early 2008, particularly for pork, poultry and vegetables, and subsequent declines explain much of the year-on-year fall,” said Jing Ulrich, Hong Kong-based chairwoman of China equities at JPMorgan Chase & Co. “Deflationary concerns appear to be subsiding as the economy shows signs of recovery.”

An exception among the declines for food was grain, which climbed 5.5 percent.

Non-food prices fell 1.5 percent, including a decline of the same size for consumer goods. Garments fell 2.5 percent. Services costs dropped 1.4 percent and utilities declined 2.2 percent.

Energy Costs

Producer prices plunged on lower raw-material and energy costs. Crude oil fell 53.6 percent, the government said.

The central bank is on guard against the risk that consumers, expecting prices to decline, will delay purchases, choking off demand and stifling economic growth. The government’s options include raising state-controlled prices of resources and purchasing farmers’ products to stabilize prices.

The flood of money into the economy from record new lending and a 4 trillion yuan ($586 billion) stimulus package makes protracted price declines less likely.

Around the globe, the worst economic slump since World War II has added to the risk of deflation, while the response to the crisis -- governments pumping cash into their financial systems -- may fuel inflation as economies revive.

Global Inflation Threat

The People’s Bank of China said last week that a recovering economy and strong lending growth are limiting price declines and a global economic revival may also help. It also highlighted risks that monetary easing by major central banks could lead to inflation risks for “the whole world.”

Ben Simpfendorfer, an economist at Royal Bank of Scotland in Hong Kong, expects prices to fall 1.5 percent in 2009, “a positive development” because of the extra spending power it will give consumers.

China has “some breathing space” before inflation makes a comeback, he said, predicting consumer prices will rise 2 percent in 2010, 5 percent in 2011 and 8 percent in 2012 because of shortages of labor, raw materials and land as the economy grows.

China may be the first economy in Asia to face inflationary risks as extra money in the financial system spurs gains in asset prices and then consumer prices, Chris Leung, a senior economist at DBS Bank Ltd. in Hong Kong, said last week.

To contact the reporters on this story: Paul Panckhurst in Beijing at ppanckhurst@bloomberg.net; Kevin Hamlin in Beijing at khamlin@bloomberg.net