Economy Sep 09

China factory deflation, retail inflation ease

Factory gate prices softened further and declined for the seventh straight month, but the deflationary pressure eased as prices of commodities recovered 

China factory deflation, retail inflation ease
Workers sort cuts of fresh pork in a processing plant of pork producer WH Group in Zhengzhou, in China's Henan province in November 2017. Photo: Dominique Patton/ Reuters.

(ATF) China's factory gate prices softened further and declined for the seventh straight month, but the deflationary pressure eased as prices of commodities recovered amid expectations of improving global goods demand.

The Producer Prices Index fell 2.0% from a year earlier in August, the National Bureau of Statistics (NBS) said on Wednesday. This was less steep than the 2.4% drop in July.

Consumer inflation dipped on moderating food prices as supply conditions improved, stoking expectations this trend could continue in the coming months.

The consumer price index in August rose 2.4% on year easing from the previous month’s 2.7% rise.

“As expected, CPI inflation started to fall from a peak in July as food supply disruptions caused by unfavourable weather conditions and clusters of Covid-19 inflections started to ease,” Jingyang Chen, HSBC economist, said.

“In particular, the restoration of pork supply led to a much slower pork price growth in August. According to the Ministry of Agriculture, the number of pigs and breeding sows in China started to rise on a year-on-year basis in the recent months, signalling that pork supply will likely improve further in the coming months, putting more downward pressure on pork prices.”

Core consumer prices, however, rose month-on-month for the first time since the coronavirus pandemic worsened in China in January.

China's economy returned to growth in the second quarter of this year, underpinned by government stimulus and as the country managed to get the virus broadly under control. Recent indicators have pointed to a sustained recovery.

"Looking through the volatility in food prices, the broader disinflationary impact from the Covid-19 downturn continues to ease," Julian Evans-Pritchard, senior China economist at Capital Economics, said.

Pork price inflation slowed last month from a higher base a year ago, when prices began to surge in August 2019 as the African swine fever decimated China's pig herd. Pork prices rose 52.6% in August from a year earlier, easing sharply from a 85.7% annual jump in July.

"Looking ahead, as the near-term weather-related distortion of food supply fades, and considering underlying recovery in pork supply capacity, along with the significant high base effect in 2H19, we expect pork price inflation to continue with a notable downward trend in the coming months,” JPMorgan economists Grace Ng, Haibin Zhu, and Anita Xu said in a note.

MODEST CPI DEFLATION

Core inflation, excluding volatile food and energy prices, rose 0.5% in August from a year earlier, unchanged from July, suggesting domestic demand still remained soft.

On a month-on-month basis, core inflation rose 0.1% in August, the first monthly rise since January, while producer prices rose 0.3%, slowing from 0.4 % in July.

“Even assuming core CPI inflation picks up modestly with a broadening of economic recovery, headline CPI inflation will likely still ease rather notably going ahead, potentially falling into modest deflation territory by late 4Q and 1Q21,” JPMorgan economists said.

But PPI deflation would continue to ease for the rest of the year, on improving domestic and external demand, Barclays economists said in a note.

 (with inputs from Reuters News)