China’s consumer, factory prices fall as demand falters

  • Consumer prices are rising more slowly than expected
  • Producer prices are falling at the fastest pace since June 2020
  • Weak prices provide the basis for policy easing

BEIJING, April 11 (Reuters) – China’s consumer inflation hit an 18-month low and factory price declines accelerated in March as demand remained persistently weak, strengthening the case for policymakers to take more steps to support the uneven economic recovery.

In contrast to rising prices globally, China’s retail and producer inflation has remained anemic as the consumer and industrial sectors struggle to recover from the pandemic. Analysts now believe that consumer inflation could fall below Beijing’s official target this year.

The consumer price index (CPI) rose 0.7% year-on-year, the slowest pace since September 2021 and weaker than the 1.0% increase in February, the National Bureau of Statistics (NBS) said on Tuesday. The result fell short of the 1.0% rise tipped in a Reuters poll.

“China’s March inflation report suggests that the Chinese economy is running a disinflationary process, pointing to greater room for monetary policy easing to boost demand,” said Zhou Hao, economist at Guotai Junan International.

The producer price index (PPI) fell 2.5% year-on-year, the fastest pace since June 2020 and compared with a 1.4% fall in February. PPI has fallen for six consecutive months.

China’s yuan hit a more than one-week low against the dollar on Tuesday morning after the data, as investors increased bets that domestic interest rates could be cut. Shanghai’s benchmark index of shares (.CSI300) fell 0.25%, reversing a small gain at the open.

Food price inflation, a key driver of the CPI, eased to 2.4% year-on-year from 2.6% in the previous month. On a month-on-month basis, food prices fell by 1.4 per cent.

That pushed the CPI down 0.3% from a month earlier after a 0.5% fall in February, dampening expectations of no change.

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The government has set a target that average consumer prices in 2023 should be around 3%. Prices rose by 2% in 2022.

“We think consumer price inflation will pick up again in the coming months as the labor market tightens again and will peak at 2.3% in early 2024,” said Zichun Huang, China economist at Capital Economics. “But it will be well below the government’s cap of ‘around 3.0%’ and the increase in inflation will be far less than what was seen elsewhere when they opened up.”

Politicians have promised to step up support for the economy, which last year recorded one of its worst performances in almost half a century due to severe covid-19 curbs.

Recent data showed China’s economic recovery remained uneven in March, with the services sector experiencing strong recovery but the sprawling manufacturing sector losing momentum due to continued weak export orders.

Producer prices are likely to continue their decline in the coming period due to weak trade and a slow recovery in consumption and real estate investment, said Bruce Pang, chief economist at Jones Lang Lasalle.

“Policies must prioritize consumption and continue to step up efforts to boost domestic demand.”

Import-dependent industries saw further price falls, with falls in oil and gas extraction increasing to 15.7% from 3.0% in February, NBS said in a separate statement.

Producer prices were unchanged from a month earlier.

The country’s central bank cut banks’ reserve requirements in March to support an economy facing headwinds including weak exports and the property slump.

Beijing must “try all methods” to stabilize exports to developed countries, Premier Li Qiang said on Friday, warning that the impact of the global slowdown on the domestic economy remains a key concern.

Analysts see limits to China’s political support.

“The PBoC cut the RRR by 25bp at the end of March. However, Beijing still has no appetite to launch massive stimulus on concerns about distortions and financial risks,” analysts at Nomura said.

Reporting by Liangping Gao and Ryan Woo; Editing by Sam Holmes

Our standards: Thomson Reuters Trust Principles.

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