China released inflation data today, showing Consumer prices rose 1.4 percent in February from a year earlier above forecasts. While this was an increase from a 0.8 percent rise in January, there is concern that the second largest world economy is at risk of heading for deflation. January’s CPI was at the lowest in more than five years.
The government has set a target of around 3 percent for inflation this year. Annual consumer inflation was 2 percent in 2014, well below the government’s target of 3.5 percent. There is concern that there will not be any sharp rises in CPI this year.
Chinas’ statistical office said the Lunar New Year holiday was the reason behind higher inflation. The monthly rebound in prices of fresh vegetables, fruit and pork was quite large and this was a reflection of the temporary impact of the lunar New Year. Second, transportation costs also rose on increased domestic traveling during holiday. Costs of air travel, long-haul bus and taxi were up by 13%, 5% and 1.5% respectively. Third, due to migrant workers returning to their homes, cost of services in general spiked higher. By contrast, non-food prices rose by a muted 0.9%.
However, after seasonal adjustment there is still downward pressure on the CPI and the seasonal pick-up in food inflation will likely prove short-lived.
The CSI300 Index of leading shares in Shanghai and Shenzhen was down 0.46 percent in reaction to the news today.
A weaker Chinese economy would affect other economies such as Australia because China is its main trading partner. The aussie has been falling today, trading down to $0.7632 versus the USD, compared to $0.7672 prior to the Chinese data.