08/08/2013 10:00 EDT | Updated 10/08/2013 05:12 EDT

China's inflation steady while fall in producer prices slows in sign economy stabilizing

BEIJING, China - China's consumer inflation held steady in July and a fall in producer prices decelerated in a new sign a slump in the world's second-largest economy might be stabilizing.

Consumer prices rose 2.7 per cent in July over a year earlier, in line with June's increase and below the government's 3.5 per cent target for the year, data showed Friday. Food prices rose 5 per cent.

Producer prices, or prices of goods as they left factories, fell 2.3 per cent from a year earlier. But that was smaller than June's 2.7 per cent decline, suggesting demand might be strengthening following a slump that has caused producer prices to decline steadily for more than a year.

July inflation figures "came in slightly below expectations, meaning that demand in China remains on the soft side," said Alaistair Chan of Moody's Analytics in a report. "Producer prices remained in deflation in July, although there was some improvement compared to June."

Consumer inflation is politically sensitive for China's communist leaders because it erodes economic gains that underpin the ruling party's monopoly on power. But pressure for prices to rise has been relatively low because supply exceeds weak demand in many industries.

Muted inflation also gives Beijing room to stimulate the economy with interest rate cuts or higher government spending if needed. Authorities have cut taxes for small businesses and stepped up spending on railway construction to spur growth but have resisted pressure for an across-the-board stimulus.

China's economic growth fell to a two-decade low of 7.5 per cent in the second quarter but the latest trade and industrial data suggest the slowdown might be stabilizing.

July imports soared 10.9 per cent over a year earlier in a sign of stronger Chinese domestic demand.

"A solid increase in commodity imports in July suggests that investment is picking up, possibly helped by an official pivot towards rail investment," said Chan of Moody's.

Communist leaders have ordered companies in industries including steel, cement and glass to shut down some factories to reduce excess production capacity. That could help to end price-cutting wars that have restrained inflation but have battered companies financially and pushed some into bankruptcy.

Premier Li Keqiang said in June that there was little room to stimulate the economy with short-term measures such as higher government spending. He said communist leaders would focus on reforms aimed at supporting entrepreneurs and encouraging domestic consumption to reduce China's reliance on exports and investment.

Government efforts to cool surging housing cost with curbs on lending and sales have helped to slow a rise in prices but also have hurt purchases of furniture, appliances and other goods by home buyers.


National Bureau of Statistics (in Chinese):