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China producer prices show deflation moderating

Surging pork prices and a rebound in global oil prices intensified consumer pricing pressures in China, where the economic recovery helped ease deflation in July, data published on Monday showed.

Consumer price inflation rose to 2.7% year-on-year in July, higher than the consensus 2.6% versus 2.5% in June while producer price deflation eased to -2.4% year-on-year in July from -3.0% in the previous month. Analysts had estimated -2.5%.

“Flooding has been a major disturbing factor behind recent pickup in food inflation, but core inflation has been moderating further, probably reflecting consumption demand may remain relatively weak,” Goldman Sachs economists said in a note.

“With the fading of the impacts from flooding, we still expect headline CPI inflation to trend down in coming months.”

CPI, a key gauge of retail inflation, had been pushed up over the past year by livestock prices after China’s pig herds were ravaged by African swine fever, with the Covid-19 outbreak later hitting supply chains.

Consumer inflation has been easing since January but ticked up again in recent months.

Senior statistician Dong Lijuan said on Monday that food prices rose 13.2% from a year ago, nudging the CPI up – with pork prices climbing 85.7%.

“With the gradual recovery of catering services, demand for pork continued to increase”, said Dong, adding that this was accompanied by floods in many areas across the country which hit the transportation of live pigs, causing supplies to remain tight.

Prices of vegetables rose also, affected by “unfavourable weather”, Dong said.

Factories hum again

Meanwhile, PPI shrank less than expected and the contraction lessened from a month ago as deflation in the petroleum industry moderated the most, followed by the metal and coal mining sectors.

Factory gate prices had been dragged down by the pandemic fallout but started rising again in June, with analysts noting a recovery in industrial demand.

“The key driver continues to be the rebound in commodity prices, with the oil and metal processing sectors seeing the fastest rises in output prices. This is consistent with broader evidence of a stimulus-led recovery in construction and industrial activity,” Julian Evans-Pritchard, senior China economist at Capital Economics, said.

“A further ramp-up in fiscal stimulus should continue to shore up infrastructure spending in the coming months, supporting a further recovery in economic activity and producer prices.”

Umesh Desai

Umesh Desai is the Executive Editor at Asia Financial. Prior to this he spent over two decades with Reuters News as Asia Pacific Chief Correspondent in Hong Kong and Bureau Chief in Bombay. Before becoming a journalist Umesh was a credit ratings analyst with Moody's arm in India - ICRA. A chartered accountant by training, Umesh began his career as an equity analyst. His Twitter handle is @umesh_desai


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