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January 11, 2019

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Inflation falls to 1.9%, lowest level since June

CHINA’S consumer inflation dropped in December to the lowest since June 2018, while producer price inflation also slumped sharply.

The Consumer Price Index grew 1.9 percent from a year earlier, 0.3 percentage points slower than the previous month, the National Bureau of Statistics said yesterday.

And this compares with the January-November 2018 average of 2.1 percent. Month-on-month, the CPI rose 0 percent from negative 0.3 percent in November.

The lower annual inflation was mainly due to the slowdown of non-food price inflation, which rose 1.7 percent year on year, 0.4 percentage points lower than November and contributing 1.38 percentage points to the overall CPI increase.

Food prices edged up by 2.5 percent year on year, unchanged from November but adding 0.48 percentage points to the growth in inflation.

The rebound of vegetable price inflation to 4.2 percent in December from 1.5 percent in November was boosted by cold weather.

But this number was still much lower than the average of 7.4 percent year on year in January-November.

This suggests that inflationary pressure from vegetables may have returned to normal after the distortion of floods in the summer, Nomura International said in a report.

Pork prices fell 1.5 percent year on year compared with 1.1 percent in November — the sixth consecutive monthly fall.

The Ministry of Agriculture and Rural Affairs has reported frequent occurrences of African Swine Fever around the country since December, including in Guangdong, Fujian, Guizhou, Shanxi and Heilongjiang provinces, which may have dampened demand, Nomura said.

In terms of non-food prices, education and entertainment prices and health care prices rose 2.3 percent and 2.5 percent year on year. Prices for gasoline and diesel, however, dropped 0.5 percent and 0.3 percent  in December, reversing their increases of 12.8 percent and 14.2 percent in November.

The Producer Price Index, which measures the cost of goods at the factory gate, rose 0.9 percent year on year in December, plummeting from the 2.7 percent increase in November, taking the average PPI inflation down to 3.5 percent in 2018 from 6.3 percent in 2017.

The slowdown in PPI inflation was led by oil and natural gas extraction, fuel processing, chemical products manufacturing, non-metallic mineral products manufacturing, and ferrous metal processing.

In month-on-month terms, PPI inflation fell deeper into negative territory, to minus 1 percent in December from minus 0.2 percent in November.

Slumping PPI inflation suggests corporate earnings will almost surely continue to fall in coming months, said Lu Ting, chief China economist of Nomura International.

“We expect PPI inflation to soon return to negative territory, reducing inventory stocks and exerting further downward pressure on China’s growth,” Lu said.

“We note our 2019 PPI inflation forecast is far below market consensus, and recent data points add conviction to our call.”

On the positive side, Lu added that falling inflation leaves more room for Beijing to roll out more aggressive policies to bolster growth and could lead to lower interbank rates and bond yields.

Raymond Yeung, chief economist for Greater China at ANZ Group also held the same view.

“If the PPI remains negative for a few consecutive months, the government may consider policy accommodation and property relaxation measures to reduce the risk of a deflationary scenario similar to that during 2012 to 2016,” he said.


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