Instant View: China June inflation quickens, producer prices fall anew

China's consumer price inflation quickened to 2.7 percent in June from May's 2.1 percent, above market forecasts and unlikely to alter views that the central bank won't move on interest rates for the time being.

Food prices were the main reason for the higher CPI number.

Subdued factory and investment growth depressed producer prices for a 16th consecutive month, highlighting over-capacity in the economy.

COMMENTARY:

KEVIN LAI, ECONOMIST, DAIWA, HONG KONG

"The price pressure for food items came back a little bit. It will be more difficult for them to ease policy, especially to cut interest rates. They may cut the reserve requirement ratio sometime in the fourth quarter.

"It reduces the likelihood of interest rate cuts this year and that is not a good policy background to have. But I think inflation will ease by the end of the year as demand won't be strong. Price pressures will last three to six months so it's not a big issue at this time."

LI HUIYONG, ECONOMIST, SHENYIN & WANGUO SECURITIES, SHANGHAI

"Consumer price inflation rebounded in June mainly on rising food prices. We expect inflation will continue to rise in coming months due to further rises in pork and chicken prices. But inflation is not a big concern this year with an expected annual increase of 3 percent, which means monetary policy still has space.

"The easing producer price inflation still shows China's economy is struggling with over-capacity problems and weak demand."

LINKS:

For details, see the website of the National Bureau of Statistics at http://www.stats.gov.cn

MARKET REACTION:

The CSI300 Index <.CSI300> of leading shares in Shanghai and Shenzhen was up 0.22 percent. The yuan was trading at 6.1314 per dollar.

BACKGROUND:

-- Beijing has set a target to cap annual consumer inflation within 3.5 percent in 2013. Inflation in 2012 was 2.6 percent.

-- Consumer inflation is likely to stay benign as long as economic activity remains weak, but analysts warn long-term inflationary risks due to higher wages and resources costs.

-- Analysts say rising property prices could also be a key factor preventing for the central bank from loosening policy.

-- The State Information Centre, a top government think-tank, has forecast full-year inflation of 2.5 percent.

(Reporting by China Economics Team)