China's annual consumer inflation cooled in March as food prices eased from nine-month highs and producer price deflation deepened, data showed on Tuesday, leaving policymakers room to keep monetary conditions easy and nurture a nascent recovery.
The National Bureau of Statistics' March inflation data reflected the tepid pace of the economic recovery that began late last year and is likely to reduce fears that monetary conditions could be tightened at an early stage in the recovery cycle.
The consumer price index showed an annual rise of 2.1 percent, well below the 2.4 percent market consensus from a Reuters poll of economists.
Producer prices dropped 1.9 percent year-on-year, broadly in line with the consensus forecast for a 1.8 percent fall, and a steeper fall than February's 1.6 percent.
"Lower inflation will greatly ease investors' concerns that the policymakers would begin to tighten monetary conditions," Haibin Zhu, chief China economist at JP Morgan in Hong Kong, told Reuters.
The CSI300 index of top Chinese shares listed in Shanghai and Shenzhen climbed around 1 percent following the data, while the China-sensitive Australian and New Zealand dollars also received a boost. China is major buyer of Australian and New Zealand exports.
Month-on-month consumer prices fell 0.9 percent versus the market consensus of a 0.6 percent drop, indicating restrained consumption triggered by a government-led internal austerity drive lauched at the end of 2012 in a bid to cut down excessive banqueting and gift-giving that is often linked to corruption.
Much of the drop in the headline CPI was explained by softer food prices which economists say are normalising after February's Lunar New Year seasonal spike, rather than reflecting any major impact from a bird flu outbreak and a pork scare after thousands of dead pigs were dumped in a Shanghai river in March.
Pork prices did fall at their fastest annual rate in three months in March, but the 5.5 percent drop was a half to a third of the rate of decline seen through most of the last six months of 2012 and driven more by the supply and demand dynamics in the pork production cycle that is dominated by small scale farmers.
Ting Lu, chief China economist at Bank of America/Merrill Lynch in Hong Kong, said that while food scares could cause inflation volatility in the near term, the long term impact of rising wages on food prices was more important.
"Rising food prices are unavoidable in the future as Chinese farmers' relative wages are further increased, so both the markets and policymakers should increase their inflation tolerance level to around 3 percent to 4 percent," Lu wrote in a note to clients.
Monetary stance
Lu expects China's monetary policy stance to be set to neutral through the first half of 2013, a position he regards as normalising after being set to easy through the second half of 2012 to engineer an economic recovery.
China's economy suffered its slowest year of growth for 13 years in 2012, expanding by 7.8 percent, though a fourth quarter bounce to 7.9 percent year-on-year was taken as the starting point of what is widely described as a modest recovery.
Investors expect GDP data due next week to confirm that the economy gained further traction in the first three months of 2013, with analysts in the Reuters poll forecasting that growth nudged up to 8.0 percent year-on-year.
The central bank said last week China's economic growth was stabilising and that inflation was "basically stable", though it noted some uncertainties over future price trends. The bank said it would keep monetary conditions "stable" in remarks made after holding its first-quarter monetary policy committee meeting.
Sun Junwei, China economist at HSBC in Beijing, said the data clearly indicated that policymakers had no cause to be concerned about inflation at this stage of an economic recovery cycle that still looks sluggish.
"We think the inflation outlook remains benign. If you look at the overall demand picture, China is recovering but the pace is still very gradual which means inflation is not a near-term concern," Sun said. "PPI shows that the recovery is coming at a really slow pace."
