China’s slow consumer inflation, deepening factory street deflation to test policy

  • Consumer inflation is slowing further, suggesting that domestic demand remains weak
  • Producer deflation deepens, underscoring the pressure on factories
  • More stimulation may be needed to lift the unstable recovery

BEIJING, May 11 (Reuters) – China’s consumer prices rose at the slowest pace in more than two years in April as factory-gate deflation deepened, data showed on Thursday, suggesting more stimulus may be needed to boost an unstable economic recovery after COVID-19.

Weak consumer price growth reinforces signals from this week’s trade data that domestic demand remains weak, while the deflationary impulse in producer prices underscores the strain on factories – a double whammy for the world’s second-largest economy as it tries to shake off the COVID-induced damage.

The consumer price index (CPI) in April rose 0.1% year-on-year, the slowest rate since February 2021, and cooling from the 0.7% annual increase seen in March, the National Bureau of Statistics (NBS) said. The result missed the median estimate of a 0.4% increase in a Reuters poll.

Manufacturer deflation also deepened last month, which, along with the CPI data, highlighted the broader economy’s struggle to recover from the lifting of COVID restrictions in December.

The producer price index (PPI) fell at its fastest clip since May 2020 and was down for a seventh month in a row, falling 3.6% year-on-year after a 2.5% fall the previous month. That compared with a forecast for a fall of 3.2 percent.

China’s economy grew faster than expected in the first quarter thanks to the lifting of Covid curbs, but the recovery has been uneven. Recent data showed that factory activity slowed, while continued weakness in the property market remains a concern.

The re-opening probably put some upward pressure on service inflation, but it was largely offset by slowing growth in food and energy prices, analysts say.

The latest data could increase pressure on the People’s Bank of China (PBOC) to cut interest rates or free up more liquidity in the financial system. It cut lenders’ reserve requirement ratio (RRR) for the first time this year in March.

China has already asked its banks to lower the ceiling on the interest they pay on certain types of deposits.

“Amid a weakened post-Covid recovery, the PBOC’s guidance to cut deposit rates, ongoing disinflation, falling market interest rates and the Fed signaling a potential pause, we continue to believe a PBOC policy lending rate cut is becoming more likely,” Ting Lu, China’s chief economist at Nomura, said in a research note.

Reuters graphics


Headline inflationary pressures remain low with core consumer inflation, which excludes volatile food and energy prices, up 0.7%, unchanged from last month.

The statistics office attributed the weaker consumer inflation to the base effect. Vegetable prices extended the decline to 13.5%, and pork, a key driver of the CPI, slowed price growth to 4.0% from 9.6% in March.

Overall, analysts are divided on whether the central bank will continue to ease policy, as record credit growth is likely to limit the extent of any monetary support it is able to provide.

“China is still in a stage of disinflation, not deflation. The post-reopening recovery bolstered by the Labor Day holiday could further stimulate CPI numbers in May, meaning there is less urgency for major monetary policy easing in the near term,” said Bruce Pang, chief economist at Jones Lang Lasalle.

Top leaders pledged at a Politburo meeting last month to maintain support for the economy, with a focus on boosting domestic demand.

“Securing income growth and improving consumer confidence remain key policy priorities to deliver a more sustainable consumption recovery,” Pang said.

Reporting by Liangping Gao and Ryan Woo; Editing by Shri Navaratnam

Our standards: Thomson Reuters Trust Principles.

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