June 3, 2023

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

  • Consumer inflation is falling further, which indicates that domestic demand remains weak
  • Producer shrinkage deepened, highlighting pressure on factories
  • Further stimulation may be required to bring about an incomplete recovery

Data on Thursday showed that consumer prices in China rose at the slowest pace in more than two years in April, while contraction deepened at factory gates, suggesting more stimulus may be needed to bolster a patchy economic recovery after the coronavirus outbreak. .

A weak rise in consumer prices reinforces signals from this week’s trade data that domestic demand remains weak, while a deflationary drive in producer prices underscores pressures on factories – a double whammy for the world’s second-largest economy as it tries to unwind. The harm caused by COVID.

The National Bureau of Statistics said its Consumer Price Index (CPI) in April rose 0.1% year-on-year, the lowest rate since February 2021, and softer than a 0.7% annual gain in March. The result was in contrast to the average estimate of a 0.4 percent rise in a Reuters poll.

The producer contraction last month also deepened, which along with the consumer price index data, highlights the broader economy’s struggles to rebound after COVID restrictions were lifted in December.

The producer price index fell at the fastest clip since May 2020 and fell for the seventh consecutive month, declining 3.6% year-on-year after falling 2.5% in the previous month. This compared to an expected decline of 3.2%.

China’s economy grew faster than expected in the first quarter thanks to the lifting of COVID restrictions, but the recovery has been patchy. Recent data showed factory activity contracting, while continued weakness in the real estate market remains a concern.

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Analysts say the reopening likely added some upward momentum to service inflation, but it was largely offset by slower growth in food and energy prices.

The latest data may increase pressure on the People’s Bank of China (PBOC) to cut interest rates or release more liquidity into 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 cap on the interest rates it pays on certain types of deposits.

ÔÇťAmidst the weak post-Covid recovery, the People’s Bank of China’s directives to cut deposit rates, persistent inflation, falling market rates, and the Fed signaling a possible pause, we still believe the PBOC’s lending rate cut It’s becoming more likely,” Ting Lu, Nomura’s chief China economist, said in a research note.

Reuters graphics

PBOC tested

Overall inflationary pressures remained subdued as core consumer inflation, which excludes food and energy price volatility, rose 0.7%, unchanged from the previous month.

The Census Bureau attributed weak consumer inflation to the primary effect. Vegetable prices extended their decline to 13.5% and pork, the main 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 can provide.

“China is still in a phase of deinflation rather than deflation. The post-reopening recovery boosted by the Labor Day holiday could spur more CPI numbers in May, which means there is less urgency for large-scale monetary easing in the near term,” he said. Bruce Pang, chief economist at Jones Lang LaSalle.

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

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

(Reporting by Liangping Gao and Ryan Wu) Editing by Shri Navaratnam

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