China's inflation pulled back in August from a three-year high while economic activity slowed, underlining expectations that the central bank can hold off on further tightening of monetary policy in the face of a global economic slowdown. Still, the central bank is far from easing policy. Analysts said inflation, which fell to 6.2 percent in August from 6.5 percent in July, will remain elevated for several months and well above the government's target of 4 percent.
In addition, policy easing could fuel the risk of asset bubbles that could destabilise the economy. "The August price data is unlikely to persuade Beijing to change its current policy stance. In an ideal scenario, Beijing should ease its monetary policy now, but I don't think the government would do so," said Tang Yunfei, economist at Founder Securities in Beijing.
The slowdown in inflation, helped in part by favourable comparisons against a year ago, was in line with forecasts of economists, who argue that inflation has peaked or will soon. Producer price inflation slowed to 7.3 percent in August from 7.5 percent in July, the National Bureau of Statistics said on Friday.
Premier Wen Jiabao and other leaders have repeatedly stressed that wrestling inflation remains the top policy priority even though a flurry of measures from rate rises to increases in bank reserves requirements to tighten monetary conditions have dragged on economic growth. That position was reiterated shortly after the inflation data by Li Daokui, an adviser to the central bank, who said the PBOC needed to maintain its "prudent" monetary policy.
But policymakers are treading cautiously for fear of slamming the brakes too hard on economic growth, analysts say. Food prices, which jumped 13.4 percent in August from a year earlier, contributed 4 percentage points to August's inflation level. Non-food inflation in August rose to 3.0 percent from 2.9 percent in July. The consumer price index rose 0.3 percent in August from the previous month, after a 0.5 percent rise in July. The figure is not seasonally adjusted.
After economic growth of 10.4 percent for all of 2010, the rate of expansion eased to 9.5 percent in the second quarter. Other data released on Friday suggested economic growth continued to ease in August, but domestic demand held up relatively well. Industrial output rose 13.5 percent in August from a year earlier, slowing from 14 percent in July. Retail sales growth eased to 17.0 percent from July's 17.2 percent.
Fixed-asset investment, a primary driver of the country's economic growth, rose 25.0 percent in the January-August period from a year earlier. That also marked a moderation from 25.4 percent in the first seven months. Export data due on Saturday will provide a glimpse of how China's economy is weathering the drop in global demand. Friday's figures helped soothe long-running investor fears of a hard landing in the world's second-largest economy.