China’s inflation cooled

-- China’s inflation cooled to the weakest pace in more than two years and producer prices fell as growth slumped in the world’s third-largest economy.

Consumer prices rose 1 percent in January from a year earlier, the statistics bureau said today, after gaining 1.2 percent in December. Producer prices fell 3.3 percent, the steepest decline in almost seven years.

Slowing inflation gives policy makers more room to add to five interest-rate cuts since September to boost domestic demand and revive the economy as exports plunge because of the worst financial crisis since World War II. The central bank is on alert for deflation because of lower commodity prices and weaker demand.

“This puts more pressure on the central bank to cut interest rates further,” said Peng Wensheng, head of China research at Barclays Capital in Hong Kong. “In the short term, the downward pressure is on prices.”

The key one-year lending rate stands at 5.31 percent after 2.16 percentage points of reductions in 2008 that followed the collapse of Lehman Brothers Holdings Inc. The central bank is yet to make a reduction this year.

Peng expects the rate to be cut a further 81 basis points this year after the economy grows as little as 5 percent this quarter.

China’s economy expanded 9 percent in 2008 after a 13 percent gain in 2007 that pushed it past Germany. In the fourth quarter of last year, growth cooled to 6.8 percent, the weakest pace since 2001, on the export decline and a slump in property.

Inflation was faster than the 0.8 percent median estimate of 15 economists surveyed by Bloomberg News. The slump in producer prices was steeper than the survey’s forecast of a 2.6 percent decline.