China's 2012 inflation rate slows, but risks seen rising

China's inflation rate slowed sharply in 2012, official data showed Friday, but analysts warned of increasing price risks this year that may limit scope for measures to boost economic growth.

The country's consumer price index (CPI), a main gauge of inflation, rose 2.6 percent in 2012, the National Bureau of Statistics (NBS) said, down from 5.4 percent the year before.

The annual inflation figure was also lower than the government's target of 4.0 percent, signalling that prices remained well under control last year.

Inflation stood at 2.5 percent year-on-year in December, the NBS said, the second straight month that the reading rose and the highest since May, when it hit three percent.

Rising food prices, particularly for vegetables due to unusually cold weather, were the major contributor to the December increase, according to the bureau.

The benign inflation environment came as China's economic expansion slowed during the first nine months of the year, with GDP growth of 7.4 percent in the three months to the end of September -- the worst in more than three years.

But data for the final three months of the year, including manufacturing, broader industrial output and retail sales, have spurred optimism among economists that growth accelerated in the fourth quarter.

However, the fact that CPI was surging on food price spikes would limit leeway for policymakers -- who are sensitive to the risk of inflation leading to social unrest -- to take further easing measures to spur economic growth, analysts said.

"The central bank is concerned about underlining inflationary pressures and it is one reason they have not cut more aggressively," said Ben Simpfendorfer, managing director of Hong Kong-based economic consultancy firm Silk Road Associates.

"So the biggest risk is this is actually a restraint on policy makers' ability to support the economy, either through rate cuts or through more stimulus," he told AFP.

Policymakers cut interest rates twice last year and trimmed the amount of cash banks must place in reserve three times from December 2011 in a bid to encourage lending and pump up economic growth.

Yao Wei, an economist with Societe Generale in Hong Kong, said that the increase in China's sub-index of housing inflation to three percent last month from 2.6 percent in November, may increase policy uncertainties.

The reading -- a key barometer of the country's property market -- covers leasing and decoration costs, but excludes purchase prices, according to the NBS definition.

"The central government may come under pressure to tighten controls on the property market once the sector shows signs of heating up, which will definitely affect the pace of the overall economic recovery," she said.

The government has sought to curb property speculation for the past two years, with measures including restrictions on second and third home purchases, higher minimum downpayments, and annual taxes in some cities on multiple and non-locally-owned homes.

The moves cooled the once red-hot market, but demand remains pent-up and government monetary policy has eased in recent months.

China releases fourth-quarter GDP figures next Friday.

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