Economy May 12

PBoC expected to step in as price gauges slide 

Consumer inflation slows while prices at factory gates contract, stoking expectations of more easing

by Nadeem Xu
PBoC expected to step in as price gauges slide
The central bank signalled it was ready to add more stimulus to China’s economy. 

(ATF) China was handed scope to roll out more monetary easing to boost the coronavirus-wracked economy after data showed price-growth slowed, stoking concerns of broader deflation.

The Consumer Price Index (CPI) declined, led by a slump in food prices and prices at factory gates actually contracted to a four-year low. Analysts expect the data will add to People’s Bank of China (PBoC) concerns after it signaled over the weekend it would take further measures to settle the economy.

“Falling CPI inflation will provide Beijing more policy space to roll out stimulus measures to offset the impact of COVID-19,” said Ting Lu, Hong Kong-based chief China analyst at Nomura.

CPI, the main gauge of inflation, grew 3.3% year-on-year, from 4.3% in March, according to data from the National Bureau of Statistics. The Producer Price Index, which measures inflation at the factory gates, fell 3.1%. 

On a monthly basis, consumer prices dropped 0.9%. Food prices, which account for nearly one-third of the weighting in China's CPI, dropped 3% last month.

In breakdown, vegetable prices slid 8% over rising supplies as the weather warms, and the cost of pork continued to retreat, declining another 7.6%, amid recovering pig production. In the first four months of this year, CPI climbed 4.5%.

Core inflation, meanwhile, fell 1.1% in April suggesting that “demand in some services sectors remains weak.

“We expect core inflation to remain subdued in coming months, as the COVID-19 shock to demand is likely to last longer (versus

recovery in supply side),” Barclays analysts led by Yingke Zhou in Hong Kong, wrote. “We think the still deep contraction in the tourism sector over the Labour Day holiday provide further evidence that it will take time for service sector demand to normalise.”

The slide in PPI was mainly due to weaker commodities prices and a drop in export demand. 

“We think the worsening in PPI deflation highlights the risk facing China’s manufacturing sector amid global recession conditions,” the Barclays analysts added.