China’s consumer inflation at an 8-year peak, but PPI drops

by Elliot C. Financial Analyst

China’s consumer inflation rose to close to eight-year peaks in November as pork prices doubled. But factory-gate prices held in the red, adding to uncertainty over whether the manufacturing sector was hitting rock bottom as trade risks persisted.

China is under pressure to unleash more stimulus to boost industrial activity. However, high inflation ahead of the Lunar New year may be a headache for policymakers trying to shore up growth that has dropped to the lowest in nearly 30 years.

In November, consumer prices rose 4.5% on the year, the fastest pace since Jan 2012.

Analyst Projections

On Tuesday, data from the National Bureau of Statistics (NBS) showed a massive surge in pork prices. The wave drove consumer prices up as African Swine fever ravaged the country’s hog herds.

Analysts expected 4.2% and October’s 3.8% rise.

Wholesale pork prices saw a slight reprieve in November but remained elevated from the previous year. The NBS said pork prices more than doubled year-on-year in November.

However, the core inflation remained subdued mainly. It excludes food and energy prices.

“The high CPI would surely have an impact on China’s monetary policy, but overall we don’t see risks of inflation spike across the board. So current monetary policy with a loosening bias will not be significantly affected,” said Liu Xuezhi,

Liu is an analyst with Bank of Communications.

Chinese watchers also predict that pork price inflation may be close to a peak. New policies to stabilize production and support the recovery of the pig herd have begun to show results.

“The month-on-month CPI saw a significant drop in November, and food price inflation might be ‘a spent bullet.’ Overall, consumer inflation will likely trend down from Q2 next year,” said Wang Jun.

Wang is the chief economist at Zhongyuan Bank in Beijing.

Despite inflation risks, PBOC has slowly picked up its speed of policy easing since late last month by cutting key Chinese rates.

The move suggests that China is keen to push ahead with lowering financing costs across the curve.

This month, China’s central bank governor Yi Gang said that China would maintain a “normal” monetary policy as long as possible. He added that its economic growth was still within a reasonable range, and inflation is mild overall.

Producer price index (PPI) turns negative again

On the contrary, the producer price index (PPI) dropped 1.4% on the year-falling from the fifth month in a row. Producer Price Index is a key indicator of corporate profitability.

Reuters’ forecast was 1.5% drop and a 1.6% drop in October.

Price declines in manufactured goods indicate a persistent weak demand, despite recent factory surveys hinting of improvements.

“There are few signs of a pick-up in demand-side price pressures,” said Julian Evans-Pritchard.

Julian is a Capital Economics’ senior Chinese economist.

In the PPI basket, higher prices of consumer goods, particularly food, were offset by more pronounced declines in the prices of industrial products.

Weak prices prevailed in oil and gas extractions and chemical fiber manufacturing sectors.

China and the US are negotiating the first phase trade deal aimed to de-escalate their trade disputes, but they disagree over key details.

Even if they strike a deal, markets expect economic growth to continue slowing in the current and coming quarters. However, government advisors said China should lower its growth target to around 6% in 2020 as trade dispute remains uncertain.

China has rolled several measures to support growth, including reductions in market interest rates. But the Chinese government insists it will not resort to a “flood-like” stimulus.

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