Chinese consumer prices climbed 1.7 percent year-over-year in October, dropping to a 33-month low, according to the latest data from the National Bureau of Statistics.
The drop in CPI was driven be a decline in food prices, while all other components saw prices rise.
Producer prices fell -2.8 percent year-over-year in October, but were up 0.2 percent month-over-month.
CPI is expected to rise before the year is out but stay in the 2 - 2.2 percent range, according to Bank of America's Ting Lu. Inflation is expected to rise because of an uptick in demand, rising price of soy beans and corn because of the drought in the U.S., and because of the base effect since inflation had cooled considerably in the fourth quarter of 2011.
Based on the latest data, inflation is not a cause of concern for policymakers, despite what the media says, according to Lu.
"Last month quite a few media misinterpreted what the deputy PBoC [People's Bank of China] governor Gang Yi just said during the IMF/World Bank annual meeting.
...What Mr. Yi really said is that the PBoC’s top tasks are price stability and asset bubble prevention. Actually most central banks in the world take price stability as their top task, but it’s not necessary for those central banks to always take inflation as the top threat. What’s new is that the PBoC now puts much more emphasis on preventing asset bubbles.
In our view, the top task for the PBoC now is to prevent growth from further slowdown while stemming the rebound of home prices. This is what we have highlighted many times in the past few months: the major constraint for policy easing in 2012 is home prices (which rebounded since mid-year) instead of CPI inflation."
Societe Generale's Wei Yao is a bit more cautious. She thinks consumer inflation wasn't as "benign" as the headline number suggested and expects inflation to "rise notably" by year-end but didn't seem too concerned by the numbers either.
Moreover, she points out that the month-over-month rise in producer prices was a good sign for the manufacturing sector. "PPI bottoming out was another constructive sign that the manufacturing sector is near the end of destocking and margin compression in this cycle."
For now she expects the Chinese central bank will "probably stay on the sidelines".
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