China May inflation at 4-month high, but plenty of room for more stimulus if needed

BEIJING (Reuters) - China's consumer inflation edged up to a four-month high of 2.5 percent in May while factory price deflation eased, reinforcing signs of stabilisation in the economy.

Still, inflation remained well within the governments' comfort zone, giving Beijing ample room to step up targeted policy support if necessary to ward off any threat of a sharp economic growth slowdown.

China's consumer price index (CPI) rose 2.5 percent in May from a year earlier, quickening from a 1.8 percent rise in April. The number slightly exceeded market expectations of 2.4 percent, data from the National Bureau of Statistics showed on Tuesday.

Food prices rose 4.1 percent in May from a year earlier, quickening from April's 2.3 percent rise, the data showed.

Month-on-month, consumer prices rose 0.1 percent versus a forecast for a 0.1 percent fall.

"The recovery of pork prices, together with last year's low base, helped the faster price rises," said Li Huiyong, an economist at Shenyin & Wanguo Securities in Shanghai.

"The comfortable inflation figure will provide sufficient room for the central bank to loosen its monetary policy in coming months to shore up the economy."

The government has set a inflation target of around 3.5 percent this year.

China's central bank recently cut the level of deposits for banks with sizeable lending to the farming sector and small firms - the latest step to spur growth.

The government has acted since April to steady growth through some focused measures, characterising it as policy fine-tuning.

Meanwhile, official manufacturing and service sector surveys showed improvement in May, adding to hopes that the economic soft patch was bottoming out.

"As we are now beginning to see monthly data picking up, the logical question is whether more easing will be needed," economists at HSBC said in a research note.

"Given that underlying activities remain relatively sluggish and funding costs (for companies) remain high, we think there is still a lot more policy makers can do. In fact we expect policy makers to stay in their current easing mode, and deliver more targeted and incremental easing measures... "

FACTORY PRICE DEFLATION EASES

The producer price index (PPI) fell 1.4 percent in May from a year earlier - the 27th consecutive month of decline - versus a 2 percent fall in April and market expectations of a 1.5 percent drop.

"The PPI figure is in line with market consensus and provides more evidence of stabilisation in the economy," said You Hongye, an analyst at Essence Securities in Beijing.

Yu Qiumei, a senior statistician at the National Bureau of Statistics, said easing factory price deflation in May indicated rising demand for industrial products.

Month-on-month, producer prices still fell 0.1 percent.

Chinese manufacturers have struggled to cope with profit-eating price declines, adding to pressure on the government to take steps to reduce financing burdens on companies.

China's exports gained steam in May thanks to firmer global demand, data showed on Sunday, but an unexpected fall in imports signalled weaker domestic demand that could continue to weigh on the world's second-largest economy. [ID: nL4N0OP036]

Chinese leaders have ruled out any large stimulus as the country is still nursing the hangover from the 4 trillion yuan ($640 billion) stimulus implemented during the global crisis in 2008-09, which resulted in piles of local government debt.

The statistical bureau is due to release data on industrial output, retail sales and fixed-asset investment on Friday. New loan and money supply data will be issued between June 10-15.

A Reuters poll found analysts expect annual economic growth to slow to 7.3 percent in the second quarter from 7.4 percent in the previous quarter, with full-year growth of 7.3 percent in 2014, the weakest in 24 years and below the government target of 7.5 percent.

(Reporting by China Economics Team; Editing by Kim Coghill)