China's inflation up 2.5% in January

Low inflation expected in coming months

Lu Ting maintained that year-on-year CPI inflation should be lower than 2.5 percent in January if the Chinese New Year effect is taken into account.

The timing of the Chinese New Year holiday should have biased January inflation readings upwards, as the Chinese New Year started on January 31 this year, compared to February 10 last year, he said.

Most likely, headline year-on-year CPI inflation will fall to around 2.0 percent in February, Lu predicted.

"Given the negative PPI inflation, strong RMB and weak global commodity prices, we expect low CPI inflation could sustain for several months," he said.

Ma Xiaoping, China economist with HSBC, agreed.

"We also expect the whole-year CPI to be well below Beijing's annual target," she said, expecting the Chinese government to set the annual inflation target at 3.5 percent.

Ma gave two reasons for the lower-than-target CPI. One is the negative output gap amid weak growth recovery, as indicated by slowdown in both the HSBC and official purchasing managers' indexes (PMIs) due to softening new business inflows and de-stocking activities.

The other is modest upstream price pressures, as indicated by the PPI year-on-year growth rate, which has remained in negative territory for 23 consecutive months amid weak demand related to excessive industrial capacity and receding international commodities prices.

Since overall inflationary pressures remain modest, China should have ample room to carry out reforms. She also said she expects the People's Bank of China (PBOC, central bank) to maintain its status quo of monetary policy in the meantime to support growth in the overall economy.

Lu Ting said that subdued inflation would be supportive of a neutral monetary policy.

"The low inflation gives the PBOC more room to ease the liquidity situation and tame rising rates, even [though] the rise of interest rates was mainly driven by the ongoing bottom-up interest rate liberalization," Lu said.

Chang Jian, chief China economist at Barclays, also looked for lower inflation in February given high base effects due to the Chinese New Year falling in February last year.

She forecast China's full-year inflation for 2014 at 3.1 percent, and said that well-contained inflation supports a neutral monetary stance.

The Chinese central bank had sounded less hawkish and emphasized "stability" and noted that it would maintain appropriate liquidity and create a stable monetary-financial environment, Chang said.

Chang said China's monetary policy bias has shifted to neutral, reflecting changes in economic conditions amid tamed inflation and moderated economic growth.

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