China's deflation pressure eased further last month with fast growth in retail sales and a rise in the consumer price index (CPI).

The National Bureau of Statistics said yesterday that retail sales rose 9.9 per cent year-on-year in August, the fastest in the past seven months and only 0.1 percentage point less than the 10 per cent recorded in January.

The CPI rose 0.9 per cent last month from the same month of last year, and 0.4 percentage points higher than in July.

But for the first eight months, the CPI - the policy-makers' key inflation gauge - rose only 0.6 per cent year on year, 0.4 percentage points short of the full-year target of 1 per cent.

The bureau said a construction boom and hot sales in cars and telecommunication equipment led the retail surge last month, sending the total retail sales to 360.96 billion yuan (US$43.5 billion).

Meanwhile, pent-up consumer demand during the SARS outbreak was released, as indicated by strong rebound in the catering industry which saw a hefty 15.4 per cent rise in sales.

"The growth rate in catering has returned to the levels before the SARS outbreak," the bureau said.

Last month, catering industry sales accounted for 13.8 per cent of total retail sales, 0.7 percentage points higher than in the first quarter.

Analysts said the retail growth was within expectations since the market showed a strong recovery after SARS was controlled in June.

Retail sales in urban areas rose 11.8 per cent to 236.48 billion yuan (US$28.4 billion) while rural areas saw a 6.5 per cent growth to 124.48 billion yuan (US$15 billion).

However, in rural areas, the CPI posted a hefty rise of 1.4 per cent while urban consumer prices registered a meagre 0.6 per cent.

Overall, food and services prices rose 2.2 per cent and 2.6 per cent respectively, contributing much to the CPI rise.

But prices of most industrial products kept declining, reflecting fierce competition in many manufacturing sectors.

A typical case is in the telecommunication sector. Prices for products such as mobile phones dropped by 18.1 per cent; while communication service prices dropped 0.6 per cent.

Experts say the CPI rise is good news for the economy, which has been caught by a deflation pressure; but price declines would eat into domestic enterprises' already-thin earnings.

"The rising CPI indicates that the nation's economy has taken a turn for the better," said Qi Jingmei, senior economist with the State Information Centre.

China has been trying to encourage more consumer spending to help keep the threat of deflation at bay.

Last year, the nation registered an 8 per cent GDP growth rate, but CPI dropped by 0.8 per cent; the situation was turned around this year with the CPI going back on a positive track.

However, experts say that room for further growth in CPI and retail sales is limited with a severe over-supply of goods in the domestic market.

A recent survey by the Ministry of Commerce found that supply will exceed demand in about 78.8 per cent of 600 main commodity items in the second half of this year.

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