China's factory prices stall amid US trade war as threat of deflation looms

BEIJING • Factory prices in China were unchanged last month from a year ago, data showed yesterday, reviving the prospect of deflation as the US trade war hits the crucial manufacturing sector.

At the same time, consumer prices managed to meet expectations, but the main support came from a surge in food prices, owing to the impact of African swine fever on pork supplies and severe weather hitting fresh fruits.

The producer price index (PPI) - an important barometer of the industrial sector that measures the cost of goods at the factory gate - came in at zero last month, down from a 0.6 per cent rise in May, the National Bureau of Statistics said.

The reading is the weakest since August 2016, and fell short of the forecast of a 0.3 per cent gain in a Bloomberg News survey.

A slowdown in factory gate inflation reflects sluggish demand, while a turn to deflation could dent corporate profits and drag on the world's number two economy, which in turn could lead to a drop in prices globally.

"The tepid inflation signals are an unambiguous sign of current and looming economic problems facing China as a direct result of trade frictions with the US," said managing partner Stephen Innes of Vanguard Markets.

The reading is the latest indication that the long-running trade war with the United States is denting the factory sector, with figures earlier this month showing activity was contracting as demand for China's goods slows.

IMMINENT TROUBLES

The tepid inflation signals are an unambiguous sign of current and looming economic problems facing China as a direct result of trade frictions with the US.

MR STEPHEN INNES, managing partner at Vanguard Markets, on what the Sino-US trade rift means for China.

Trade discussions between Beijing and Washington resumed on Tuesday as top negotiators held phone talks seeking to patch up the trade rift hurting the world's top two economies.

Meanwhile, China's cost of food continues to rise, as the consumer price index (CPI) - a gauge of retail inflation - hit 2.7 per cent, the same as last month, which was the highest since February last year.

Food prices bounced 6.1 per cent last month from last year, led by a 21.1 per cent jump in the cost of pork - which also lifted the prices of other meats such as chicken. The cost of fresh fruit soared more than 40 per cent as wet weather in the south hit crops, Bloomberg News reported.

The African swine fever epidemic has wiped out China's pig herds since hitting the country last year.

"The recent collapse in pig supply suggests that upward pressure on food prices is likely to intensify in the coming months," said Mr Julian Evans-Pritchard of Capital Economics in a note.

Chinese officials said last week that new cases of African swine fever have declined and pork production is returning to normal. However, reporting by news outlet Caixin and analysts say the government is downplaying the size of the problem.

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A version of this article appeared in the print edition of The Straits Times on July 11, 2019, with the headline 'China's factory prices stall amid US trade war as threat of deflation looms'. Print Edition | Subscribe