Chinese inflation hit a lower-than-forecast 4.9% in January, but
price pressures excluding food were their strongest in at least a decade
and will force the central bank to keep tightening monetary policy. In
a tentative sign that its actions so far, including higher interest
rates and lending restrictions, have started to bite, money growth eased
to its slowest pace in six months in January at 17.2% year on year. "The
money supply and lending data suggest that government efforts to clamp
down on liquidity might be taking hold, though broad-based inflation
provides no leeway for the central bank to relax its tightening stance,"
said Connie Tse, economist at Forecast PTE in Singapore. Analysts
in a Reuters poll had forecast January’s inflation at 5.3%, up from
4.6% in December. Contrary to expectations, a change in how the consumer
price index is calculated added to the reading, rather than subtracted
from it. In one sign of the accumulating pressures, core
inflation, stripped of volatile food prices, jumped to 2.6% year on
year, the highest in at least a decade, from 2.1% a month earlier. In
another sign, soaring global commodity costs pushed producer prices up
6.6% in the year to January, up from 5.9% in December and well above the
6.1% rise forecast by analysts. "The large increase in PPI
inflation suggests that price pressures will remain uncomfortably
strong, at least for the next few months," said Brian Jackson, economist
with Royal Bank of Canada in Hong Kong. Asian stocks and
global commodities edged down, having jumped on Monday when rumours of
the lower-than-expected inflation figure first swirled through markets,
easing fears that China would need to unleash aggressive monetary
tightening. The Chinese central bank raised interest rates last
week for the second time in just over six weeks. It has also raised the
amount of money banks have to hold in reserve seven times since the
start of last year to try to mop up the excess cash in the economy that
has fuelled inflation. NEW CALCULATION The National
Bureau of Statistics said its adjustment in the way it calculates
consumer price inflation better reflected the evolution in Chinese
consumption patterns. "February CPI is expected to be about 5.2%,
and if it is significantly lower than that, we may conclude that
inflation in China has changed fundamentally," said Gao Shanwen, chief
economist with Essence Securities in Beijing. "Or we can say that the
CPI indicator itself is quite doubtful in terms of reliability." Housing
was given a much larger share of the new CPI basket, while the
weighting of food prices was reduced. These changes were consistent with
an economy that is fast becoming more prosperous, allowing urbanites to
spend a smaller portion of their incomes on basic needs and more on
big-ticket items. Many in the market had expected that the
adjustment, conducted every five years, would lower the CPI, but the
statistics agency said the adjustment had actually added 0.024
percentage point to January’s reading. At least some investors
and analysts took the statistics agency at its word, and said that lower
inflationary pressure would reduce the need for a big dose of interest
rate increases. China’s main stock index was steady after soaring 2.5%
on Monday. Ting Lu, an economist with Bank of America-Merrill
Lynch, noted that the biggest surprise was the 10.6% increase in food
prices year on year. Many had thought a larger rise was in store,
because the Chinese New Year fell earlier in 2011 than 2010 and that
was expected to push up food costs in January. "The implication here is that inflation pressure might be smaller than the market had thought," he said. UPSIDE RISKS Despite
increasing interest rates and raising bank reserve ratios, Chinese
officials are still concerned about the rapid expansion of bank lending.
Banks issued 1.04 trillion yuan in new loans in January, a touch
below the market consensus of 1.2 trillion yuan, but still a hefty
number when inflation is running near its fastest in three years. "New
yuan loans are at the lower end of the market’s expected range,
indicating that the regulators’ tightening measures have yielded some
effect," said Wang Hu, an analyst at Guotai Junan Securities in
Shanghai. "But the figure is still very strong and reflects a robust demand for loans in the first month of this year," he added. As
a centrepiece of its economic policy, China sets loan quotas to guide
credit issuance by banks. Because of the country’s relatively stunted
financial markets, these targets are more important than interest rates
in controlling the pace of money growth and inflation in the Chinese
economy. Loan quotas took on extra urgency last month because
banks began the year by unleashing their customary early-year lending
surge at the same time as officials were trying to slow credit expansion
to rein in prices. Another worry for China is a drought that has
beset its major wheat-producing region since October, threatening to
push up grain prices and fuel further food inflation. "The
unfavourable weather conditions have raised supply-side risks for
production of agricultural products, and simultaneously reinforced
inflationary expectations," Qu Hongbin, chief China economist at HSBC,
said.
" USD- Retail sales fall for the month of January .."..
" we'll see consumer spending growing this year, albeit at a moderate pace ".....
Sales at U.S. retailers rose less
than forecast in January, depressed by a drop in demand at
building material stores and restaurants that may reflect the
influence of harsh winter weather.
Purchases increased 0.3 percent, the smallest gain since a
drop in June and followed a 0.5 percent December gain that was
less than previously estimated, Commerce Department figures
showed today in Washington.
Sales at retailers like Gap Inc., Limited Brands Inc. and Macy's Inc. topped analysts’ estimates last month as merchants
used promotions to lure post-holiday shoppers before storms
blanketed much of the U.S. mid month. Federal Reserve policy
makers are among those saying bigger gains in employment are
needed to ensure American consumers sustain spending.
“We’ll see consumer spending growing this year, albeit at a
moderate pace,” Guy LeBas, chief fixed-income strategist at
Janney Montgomery Scott LLC in Philadelphia, said before the
report. “Unemployment remains stubbornly high.”
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