CPI rises to near two-year high of 2.3%

China's consumer inflation jumped to 2.3 percent in February, its highest in nearly two years, a positive sign of demand that helped ease fears that China could fall into a deflationary trap.

The Consumer Price Index beat expectations to grow at its fastest pace since July 2014, up from January's 1.8 percent gain, the National Bureau of Statistics said on Thursday. Translated into month-on-month growth, the inflation index expanded 1.6 percent, its fastest pace since March 2008.

The uplift is mainly food-driven and thanks to the traditional Spring Festival, which fell in February. The festival drove up demand for food, as pork prices jumped 25.4 percent year-on-year, and vegetables rose a hefty 30.6 percent. Unusual cold weather caused a tightening in the supply of vegetables, according to economists.

Falling prices can be a boon to consumers but it also warned of a deflationary risk, which encourages shoppers to delay purchases and companies to put off investment, in turn further squeezing demand. Moderate inflation, instead, is a positive signal for the whole economy. The government set a CPI target of less than 3 percent this year.

Despite the encouraging headline numbers, economists at Australia & New Zealand Banking Group said the rise in food prices is likely to be temporary and that consumer inflation will remain mild in coming months.

"Daily wholesale food prices show that prices have moderated slightly in early March," ANZ said in a research note.

"Non-food CPI edged down to 1 percent year-on-year in February, 0.2 percentage point lower than that in January, reflecting disinflation in the other components of the CPI."

Tom Orlik, chief North Asia economist with Bloomberg Intelligence Economics, said: "The 7.3 percent jump in food prices accounted for the entirety of the rise... A rise in consumer prices on the back of seasonality and supply-side shocks to food is little to get excited about."

He said more resilient factory gate prices were a little more encouraging. The Producer Price Index, which measures prices of goods at the factory gate, fell 4.9 percent year-on-year, meeting expectations, and was an improvement on January's 5.3 percent drop.

But it was the 48th consecutive monthly fall as overcapacity in manufacturing drags on China's growth, with the protracted PPI declines bad news for industrial profits.

"Deflationary pressure has eased a bit. We expect in the next few months CPI will remain above 2 percent," said Liu Liu, an analyst with investment bank China International Capital Corp.