Chinese Inflation Indexes Disappoint Versus Overall Economic Recovery

Chinese factory-gate prices saw sharper-than-expected falls in October, with weak fuel demand counterbalancing recoveries in the trade and manufacturing sectors from their COVID-19-induced slump.

Data from the National Bureau of Statistics (NBS) released earlier in the day showed a Consumer Price Index (CPI) and Producer Price Index (PPI) disappointing expectations. CPI grew 0.5% year-on-year, against the 0.8% in forecasts prepared by Investing.com and September’s 1.7%, the slowest growth since October 2009. It contracted 0.3% month-on-month, tumbling below the forecast and September’s 0.2% growth.

The PPI contracted 2.1% year-on-year, missing the forecast contraction of 2.0% but remaining level with September’s 2.1% contraction.

Consumer inflation also slumped to a 11-year low, with pork prices halting a 19-month-long period of increases. The long period of growth is attributable to a shortage of the meat, which is popular throughout the country, due to African swine fever. Prices fell 2.8% year-on-year in October, compared to the 25.5% increase in September.

Oil and gas extraction prices fell 4.9% month-on-month in October while fuel processing costs declined 1.6%, NBS senior statistician Dong Lijuan said in a statement.

Although the weak readings largely reflect swings in volatile items, they also suggest that upstream demand for industrial goods remains weak overall, despite recent signs of small improvements.

However, some investors remained optimistic, with the Chinese economy expected to post a modest gain for the full year, then gather speed in 2021 over cautious hopes that a COVID-19 vaccine will be made available globally by then.

“We expect both CPI and PPI to be subdued in the fourth quarter … however, inflation will likely rebound after Q1 2021, thanks to the growing post-pandemic demand,” ANZ markets economist Zhaopeng Xing told Reuters.

“Consumer price inflation looks set to drop back further in the near-term as pork supply continues to recover from last year’s African swine fever outbreak,” Capital Economics senior China economist Julian Evans-Pritchard said in a note after the data release, striking a more cautious note than Xing.

“Policymakers are likely to look through the volatility in food prices and focus on the recovery in underlying inflation. As such, we don’t think low headline inflation will prevent the People’s Bank (of China) from raising interest rates next year,” the note added.

The data follows Monday’s trade data, which showed that exports rose 11.45% year-on-year and the trade balance rose to $58.44 billion, but that imports rose 4.9% year-on-year, down from the predicted growth of 9.5% and September’s 13.2% reading.