China's top economic planner projected China's consumer price index (CPI), the country's main gauge of inflation, could see a 3 percent year-on-year gain in May and June, lower than expectations of the State Information Center (SIC), the Chinese Academy of Social Sciences (CASS) and analysts with banks.

"Thanks to better weather and growing supply, farm produce prices including vegetables and fresh fruits will fall back in the second quarter. The country's efforts on gain reserves in drought-hit southwestern China and earthquake-stricken Yushu in northwest China's Qinghai Province are also in favor of ensuring stable grain prices," the National Development and Reform Commission (NDRC) said Tuesday on its website.

However, a low comparison base will drive the CPI in the second quarter to rise moderately, the NDRC said.

The SIC, the Chinese Academy of Social Sciences and analysts with banks are not as optimistic as the NDRC. The SIC said the CPI in the second quarter will rise 4.2 percent.

The CASS is expecting the CPI to see a 3.5 percent rise this year, up from its previous forecast of 2.1 percent.

The 2.8 percent rise in April CPI enhanced market expectations of fiscal tightening measures.

Lu Ting at Bank of America-Merrill Lynch in Hong Kong said in a note to the Global Times last week rising headline CPI inflation poses a tough task for policymakers in managing inflation expectations, adding project cancellation, local government debt restructuring and rate hikes will be tasks in the second half of this year as part of China's fiscal exit strategy.

Lu is expecting the CPI to peak at around 4 percent year-on-year in mid- 2010.

Liu Shengjun, deputy director of the CEIBS Lujiazui International Finance Research Center, said the pressure for rate hikes has eased because asset price hikes have been mitigated as the government's curbs on the property market have had some effect. Imported inflation has also been relieved as crude oil prices have fallen.

"But uncertainties still exist (that make it hard) to make an accurate prediction," Liu told the Global Times. "Nobody knows whether the flood (in South China) will spread and how long it will last. If housing prices are down 20 percent, it might not a big blow to the market. But if a deeper callback happens along with stern local policies, the equity market, property market and consumer confidence will be hit hard. And that will be reflected in consumer prices."

The government is shunning price-based monetary tools, using instead quantitative instruments including the required reserve ratio and other administrative means. "We expect in the next couple of months there will be fresh measures to control the increase in consumer goods prices," Lu said.

The economic planner said last week the CPI growth rate in the third quarter will gradually decline as factors contributing to rising prices will wane and the government's full-year target of a 3 percent rise in CPI is achievable.

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