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Lower inflation leaves room for energy price hikes

(Agencies)
Updated: 2008-09-10 16:48

The slowdown in the rate of inflation to 4.9 percent in August could persuade the government to further raise energy prices in the coming weeks, according to a research note by Morgan Stanley.

"Consumer inflation dropping below 5 percent strengthens our observation that Chinese policymakers have shifted their focus from preventing overheating and fighting inflation to supporting economic growth," the note said.

"We are convinced that energy price normalization will feature prominently in the post-Olympics policy package, alleviating pressures on the fiscal budget from mounting subsidies," it added.

Morgan Stanley has revised its full year inflation forecast to 7 percent, factoring in further increases in energy prices, it said.

It said that while upstream (PPI) inflation remained relatively high, the pick-up was driven more by higher excavation and manufacturing prices, rather than the rising cost of raw materials.

While domestic oil prices will continue to rise to international levels, the PPI is likely to peak and begin to tail off in the coming months, Morgan Stanley predicted.