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Inflation eases further to two-year low of 3 percent

By Song Shengxia (Global Times)

08:13, June 11, 2012

China's inflation further dropped to a two-year low of 3 percent in May, data released over the weekend showed, giving the government more scope for policy easing to stimulate a slowing economy, following the interest rate cut last week.

The country's consumer price index (CPI), a major gauge of inflation, rose 3.0 percent from a year earlier in May, lower than 3.4 percent in April and 3.6 percent in March, the National Bureau of Statistics said on Saturday.

The figure was the lowest since July 2010 and below the market expectations of a 3.2 percent increase.

Food prices, which account for nearly one-third of the weighting in the calculation of China's CPI, moderated to a 6.4 percent year-on-year increase, compared with 7 percent rise in April.

The producer price index (PPI), which measures the price changes for major commodities by manufacturers at the wholesale level, slipped 1.4 percent in May year-on-year, a sharp fall compared to a 0.7 percent decline in April.

"The May prices data suggested that the price pressure has greatly eased, making economic slowdown the main area of concern instead of inflation. It explained the central bank's latest move to cut interest rates," Yang Li, an analyst with Adfaith Management Consulting, told the Global Times.

The People's Bank of China, the country's central bank, announced Thursday interest rate cuts by 25 basis points for the first time in nearly four years, a move which analysts said sends a clear signal that the government is stepping up efforts to augment the economy.

"The data confirms a softening inflation in China, which will provide more room for further policy stimulus measures and utility price hikes," Lu Ting, an economist with Bank of America-Merrill Lynch, said in a research note.

"Moreover, the widening gap between year-on-year CPI and PPI inflation suggests that profit margins could improve for downstream manufacturing sectors," Lu said.

On Friday, the National Development and Reform Commission (NDRC), the country's top economy planner, cut prices of gasoline and diesel for a second time this year in response to falling global crude prices.

Li Xunlei, chief economist with Haitong Securities, said that although the government has stepped up efforts to boost the slowing economy, including speeding up investment in infrastructure and interest rate cut, such measures will not reverse the trend of gradual price declines for the rest of the whole year.

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