Economists project China inflation will drop to 5.5% in data to be released tomorrow

11/08/2011 4:02 pm EST


Jim Jubak

Founder and Editor,

Inflation in China will show a drop to a 5.5% annual rate in October in data to be released on Wednesday, according to economists surveyed by Reuters. That would be the third straight monthly drop from July’s peak at 6.5%. The drop below 6%, after inflation came in at a 6.1% annual rate in September, would break a significant psychological level.

It’s not likely to be low enough—China’s official inflation target is 4%--to lead to an outright interest rate cut from the People’s Bank of China. (I still expect that won’t happen until after the December data at the earliest.) But with China’s economy looking very soft at the moment a drop to 5.5% inflation might be enough to start the People’s Bank unwinding a few of the nine increases in bank reserve ratios put in place as part of the tightening policy begun in 2010.

Economists also project that inflation at the producer level—an indicator of the future pace of consumer inflation—will fall to 5.7% in October from an annual 6.5% rate in September.

The market reaction to an October drop in inflation is likely to be mixed. On the downside, some investors will see it as confirmation of their worries that growth is slowing too quickly in China. On the upside, other investors will see it as a sign that interest rate cuts, which would reaccelerate the economy and rally China’s stock markets, are drawing closer. Over the next six months or so, I expect the second reaction to prevail. But in the short-term, the general worries about global growth could push investors to the pessimistic interpretation.

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