China producer prices in deflation for first time since 2020

BEIJING – China’s producer prices fell into deflation for the first time in nearly two years as

Covid-19 outbreaks and lockdowns dragged on demand

and some global commodity prices continued to slide, pressuring companies to cut prices.

The producer price index (PPI) declined 1.3 per cent in October from a year earlier after gaining 0.9 per cent the previous month, the National Bureau of Statistics said on Wednesday. The decline was slightly smaller than the 1.5 per cent drop expected by economists, and it marks the first fall in the gauge since December 2020.

The consumer price index (CPI) rose 2.1 per cent year-on-year, slowing from a 2.8 per cent gain in September and less than the 2.4 per cent forecast. Core inflation, which excludes volatile food and energy prices, was unchanged at 0.6 per cent. 

The downward trend in PPI is expected to continue, said Mr Bruce Pang, chief economist at Jones Lang Lasalle Inc. “We think that China may begin to engage in a fierce battle with looming risks from deflation with weak domestic demand and softening export demand.”

China’s consumer and producer prices have been subdued in 2022 in comparison with other nations, where central banks have raised interest rates repeatedly to tame costs. Demand in China has been hit hard by the

ongoing property market crisis

and repeated Covid-19 outbreaks and lockdowns, which have weighed on confidence.

China’s benchmark CSI 300 Index of stocks extended losses after the data, falling 0.5 per cent as of 9:58am local time.

The weakness in factory prices is in part because of a high base of comparison from 2021, when global commodity prices rallied on booming post-pandemic demand and tight supplies. PPI hit a 26-year high at this point in 2021. 

Slumping commodity prices in 2022, though, are also a factor. Year-on-year price declines in cement, rebar and copper deepened in October, while prices of upstream products – including oil and coal – mostly narrowed gains or widened declines, according to Bloomberg Economics.

Consumer inflation, meanwhile, has been muted in 2022 as Covid-19 outbreaks and curbs suppressed demand for everything from transportation to services. Strict mobility restrictions around the party Congress and fresh lockdowns in October likely contributed to the knock on demand. 

Falling demand after the early October holiday period and a high base of comparison were factors that dragged on consumer price growth in the month, said NBS chief statistician Dong Lijuan.

Even so, food prices remained elevated, with pork accelerating to 51.8 per cent in October –

the highest rate all year.

China, which produces and consumes about half of the world’s pork, has been selling the meat from state inventories in a bid to cool rising domestic prices.

The soft figures suggest the government still has room to support the economy, according to Mr Zhou Hao, chief economist at Guotai Junan International Holdings Ltd. Growth is under pressure because of the property downturn and Covid-19, with economists forecasting gross domestic product to expand just 3.3 per cent in 2022.

“As both inflation indicators remain soft, pointing to weakening domestic demand, there is room for further policy support from Beijing over the foreseeable future,” he said, adding that the recent rollout of quota for special bonds – often used for infrastructure investment – was a sign that “fiscal spending is set to accelerate soon.” BLOOMBERG