BEIJING--Inflationary pressure in June eased slightly in China, giving policy makers more room to employ targeted fiscal and monetary measures in their bid to prop up economic growth.

China's consumer-price index rose 2.3% in June from a year earlier compared with a 2.5% year-over-year rise in May, the National Bureau of Statistics said Wednesday. The gauge of inflation remains below Beijing's annual target of 3.5% year for 2014 and slightly undershot the median 2.4% gain forecast by a poll of 21 economists by The Wall Street Journal.

"Inflation isn't really going anywhere," said HSBC analyst John Chua. "This probably gives Beijing more policy flexibility. They don't worry about the economy running at full capacity."

The world's second-largest economy saw its slowest growth in 18 months during the first quarter, expanding by 7.4% year on year, compared with 7.7% in the fourth quarter of 2013.

That sparked a broad-based effort to prop up output to meet the annual growth target of 7.5%, including expanded spending on rail and social housing, tax breaks for small companies and more credit targeted at farmers and entrepreneurs. China's economy still remains under strong government control two decades after reforms liberalizing the economy were enacted, and targets are taken seriously.

Looking ahead to the third quarter, some have called for a broad-based cut in the reserve requirement ratio, the amount of funds that banks must keep in reserve with the central bank, as a way of increasing credit. "I think there should be a cut in RRR for a least 60% of the banks in China in the early part of 3Q," said ANZ economist Liu Ligang.

Despite persistent downward price pressure on construction materials, and measured declines in the price of pork and vegetables, other commodities such as fruit and some metals have seen price increases recently.

Food price rises had a significant impact on June's CPI figure, said PNC Financial Services Group economist Bill Adams. Prices of manufactured goods in the consumer basket rose modestly. And the cost of labor-intensive services rose much more rapidly, including a 7.3% year-over-year increase in home services and repairs, although their share in the Chinese consumer basket is small, he added.

Analysts said they expect pressure on prices to remain relatively muted in coming months.

"For the second half, we think the food inflation cycle, which is a main driver for CPI, is unlikely to see a substantial pickup," said J.P. Morgan economist Haibin Zhu, who forecasts 2.0% inflation for 2014. "The risk is low for a shortage in pork or vegetables, which have driven up prices in the past," he added.

China's producer-price index, a gauge of prices at the factory gate, fell 1.1% in June from a year earlier, slower than a 1.4% year-over-year decline in May. The index has remained in negative territory for 28 straight months. But ING economist Tim Condon said he doesn't expect a huge risk of deepening deflation. "I think we've seen the low in PPI deflation," he said. "We're seeing a kind of sluggish turn. I reckon it will stabilize at a fairly low level."

Liyan Qi, Mark Magnier and Eva Dou

(END) Dow Jones Newswires

July 08, 2014 23:14 ET (03:14 GMT)

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