China's inflation in May is likely to fall from recent highs, but upstream inflationary pressure may have continued to build up, analysts said.
The nation's consumer price index is expected to grow 7.7 percent year-on-year in May, compared with 8.5 percent in April, said Goldman Sachs' economists Liang Hong and Song Yu in a research note.
Ken Peng, an economist with Citigroup said the May inflation rate could be 7.8 percent compared with a year ago.
The expected drop is likely to be the first significant decline of year-on-year inflation rate since the March of 2007, when the nation's consumer prices started its marathon-style rise. This may lend some relief to the government, which has pointed inflation as the main concern for economic growth.
Analysts say the ease came as food prices started to retreat, thanks to moves to boost produce supply.
"Weaker headline inflation may increase the likelihood for the government to relax price controls for non-food items, such as energy," said Citigroup's Peng. "Current stability in domestic fuel and utility prices are maintained at increasing costs to the government through subsidies."
The authorities have required companies to stabilize prices of public utilities, despite rising cost of oil, coal and so on. The move has helped to ease inflationary pressure, but some analysts criticized it as distorting the supply and demand relationship and may force loss-making energy companies to reduce production and eventually cause a supply shortage.
Analysts say the producer price index (PPI), which measures the price change at factory gate, may accelerate further to 8.5 percent year-on-year in May, up from 8.1 percent in April.
This came as steel and coal prices continue to make new highs, while the oil price has risen close to $139 per barrel in the past week.
PPI is said to be a leading signal for inflation, as when production cost rises, it will be passed onto consumers sooner or later.
Goldman Sachs' Liang said the elevated upstream inflationary pressures will not give the central bank any room to relax its monetary tightening program.
Meanwhile, China could also "use stronger yuan to make imports cheaper and thus ease inflation", Xu Lianzhong, a senior official with National Development and Reform Commission.
The Chinese yuan rose to 6.919 per dollar yesterday, the highest level since its revaluation in 2005.
Source: China Daily
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