Update: China’s Consumer Inflation Slips Amid Easing Pork Prices

Consumer inflation saw a slight drop in August, dragged down by moderating food prices, while the contraction of factory-gate prices eased as the world’s second-biggest economy continued to recover post-epidemic, official data showed Wednesday.

The consumer price index (CPI), which measures changes in prices of a basket of consumer goods and services, rose 2.4% year-on-year (link in Chinese) last month, down from a 2.7% increase in July and marking the first monthly deceleration since May, data from the National Bureau of Statistics (NBS) showed. The August reading was in line with the median estimate in a Caixin survey (link in Chinese) of economists.

Food prices rising at a slower pace contributed to the CPI deceleration, as supply disruptions caused by unfavorable weather conditions and Covid-19 flare-ups started to ease, HSBC Global Research economist Chen Jingyang wrote in a note.

Food prices rose 11.2% year-on-year last month, down from 13.2% growth in July, contributing 2.33 percentage points to August’s CPI inflation, according to an NBS statement (link in Chinese).

Pork prices remained the major driver of CPI growth, surging 52.6% year-on-year last month, accounting for 1.74 percentage points of the overall increase in the CPI. However, the reading was down from 85.7% growth in July, marking a 12-month low, as China continues to recover from the deadly African swine fever outbreak that decimated production.

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“While pork supply improved a bit, demand also increased,” Dong Lijuan, a senior NBS statistician, said in the statement. In August, pork prices grew at a slower clip due to a high comparison base in the same month last year, she said.

The core CPI — which excludes more-volatile food and energy prices and may better reflect long-term inflation trends — rose 0.5% year-on-year in August, unchanged from the month before, according to the NBS.

Factory-gate deflation eased as the producer price index (PPI), which measures changes in prices of goods circulated among manufacturers and mining companies, fell 2% year-on-year (link in Chinese) in August. The reading, in line with the median estimate in the Caixin survey, was milder than a 2.4% drop the previous month, marking the third consecutive monthly rebound.

The continuous recovery in industrial production and market demand, as well as rising global commodity prices, were behind the PPI’s improvement, according to the official statement.

However, economists at Nomura International (Hong Kong) Ltd. predict that PPI deflation could stay at around minus 2% for the next couple of months due to energy and commodity prices remaining weak after some initial recovery.

Chen also expects the PPI to remain negative for some time, as overall domestic demand may stay weak due to impaired household incomes and a sluggish private sector recovery.

This, plus an expected downward CPI trend, will give China’s central bank ample policy space to support a continued recovery in domestic demand in the coming months, including targeted credit support for small and midsize enterprises, Chen said.

However, with infrastructure-led stimulus still being ramped up, demand-side pressures on prices may strengthen in the coming months, pushing up underlying inflation, economists at London-based Capital Economics Ltd. wrote in a note.

Contact editor Joshua Dummer (joshuadummer@caixin.com)

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