China's rising CPI, deepening factory deflation challenges central bank

 A customer takes a 50 Yuan note out as she pays for pork at a market in Beijing, Aug 12, 2015.
A customer takes a 50 Yuan note out as she pays for pork at a market in Beijing, Aug 12, 2015. PHOTO: REUTERS

BEIJING (BLOOMBERG) - China's consumer prices rose at the fastest pace in a year as a pork supply crunch drives up the cost of the staple while factory-gate deflation deepened to the worst in almost six years, compounding challenges for policy makers.

The consumer-price index increased 2 per cent in August from a year earlier, compared with the 1.8 per cent median estimate in a Bloomberg survey. The producer-price index fell 5.9 per cent, extending declines to 42 straight months.

The price divergence complicates the policy outlook for the People's Bank of China. CPI inflation is now higher than the one-year benchmark deposit rate, crimping real interest rates for savers. Meantime, factory deflation is pushing up real borrowing costs for the industrial sector.

"This is a real problem," said Zhu Qibing, an analyst at China Minzu Securities Co. "For a manufacturer, CPI represents its costs because wages rise, and PPI represents the prices of its product. Now profits of enterprises are being further eroded."

The pickup in CPI was due to surges in pork, vegetable and egg prices, Yu Qiumei, senior statistician at NBS said in a statement after the data. Food prices rose 3.7 per cent in August from a year earlier as pork increased 19.6 per cent and vegetables 15.9 per cent.

China's official factory gauge fell to the lowest reading in three years last month and exports dropped, underscoring weakness in the world's second-largest economy. Premier Li Keqiang on Wednesday sought to soothe concerns over the slowdown, saying the economy was operating in a reasonable range even as it faces downward pressure.

"We will not be swayed by short-term fluctuations in economic indicators, but we will also not let down our guard," Mr Li said at the World Economic Forum's "Summer Davos" meeting in Dalian.

Mr Li said the structure of the economy is trending in a positive direction as the government promotes new drivers of growth and continues with reform. He said China can maintain mid- to high-speed growth.

Market gyrations have presented Mr Li with new challenges as the Shanghai Composite Index doubled in less than a year to a seven-year high in June, then plunged 43 per cent in two months. The premier said measures taken in July amid the stock market plunge prevented systemic risks from spreading.

The PBOC has cut interest rates five times since November and lowered the proportion of deposits banks have to set aside as reserves in a bid to cushion the economy's slowdown.

"There is no real way out of this if we depend solely on monetary policy. Monetary policy can't solve the structural problems," China Minzu's Zhu said. He said more proactive fiscal policies are needed, including cutting taxes and fees to relieve the burden on companies.