China’s factory inflation hits 17-month low, consumer prices rise

China’s factory inflation hits 17-month low, consumer prices rise

A worker walks past steel coils at the Chongqing Iron and Steel Works in Changshou, Chongqing, China, August 6, 2018. Portal/Damir Sagolj/File Photo

  • July producer inflation at lowest since February 2021
  • Consumer inflation hit 2-year high in July
  • The PBOC remained accommodative to fuel growth

BEIJING, Aug 10 (Portal) – China’s ex-factory inflation slipped to a 17-month low in July, defying global cost pressures as slower domestic construction activity weighed on commodity demand, although consumer price hikes hit a two-year high as pork supplies picked up .

The producer price index (PPI) rose 4.2% year-on-year, the National Bureau of Statistics (NBS) said on Wednesday, up from a 6.1% rise in June and analysts’ median forecast of 4.8%.

Producer price growth in China has slowed from a 26-year high in October last year, giving policymakers some leeway to stimulate the flagging economy even as central banks elsewhere scramble to stem rampant inflation with aggressive rate hikes to dampen.

The consumer price index (CPI) rose 2.7% year-on-year, the fastest pace since July 2020 but below forecasts for a 2.9% rise.

The government has set an annual consumer inflation target of around 3%, while Premier Li Keqiang said last month China could keep price inflation below 3.5% in 2022, highlighting the need for price and employment stabilization.

“If we can keep the unemployment rate below 5.5% and CPI growth stays below 3.5% for the whole year, we can live with a growth rate that’s slightly above or below target, not too low of course,” said Li said in a discussion with business leaders hosted by the World Economic Forum.

While China’s relatively benign inflation was largely due to weak domestic demand, an easing in global pricing pressures, such as falling oil prices, also contributed to the July slowdown.

“Factory gate inflation will remain on a downward trend for the remainder of the year amid a further decline in commodity prices, easing supply shortages and a higher basis of comparison,” said Zichun Huang, China economist at Capital Economics, in a research note.

In a sign of slowing momentum, the PPI fell 1.3%m/m, marking the first monthly decline since January, with metals and petrochemicals seeing the biggest price declines.

On an annual basis, prices in the coal mining and scrubbing industry rose 20.7%, slowing 10.7 percentage points from June, while the oil and gas exploration industry rose 43.9%, down 10.5 percentage points, said the NBS in a separate statement.

POSSIBLE AUTUMN

Input prices slumped in July, China’s official purchasing managers’ index showed last week, on a fall in energy and commodity costs and a possible fall in producer prices. Continue reading

The world’s second-biggest economy has slowed significantly, narrowly escaping a contraction in the June quarter weighed down by tight COVID-19 controls, a struggling housing market and cautious consumer sentiment.

The People’s Bank of China (PBOC) said in a quarterly report on Wednesday that it will closely monitor domestic and external inflation changes while balancing economic growth and price stability.

Analysts at ANZ expect consumer prices to continue rising in the coming months, peaking at around 4% in September, but full-year inflation could come in at 2.4%.

In July, the main driver of consumer prices was food inflation, which rose 6.3% yoy after rising 2.9% in June.

The driver of the broader food surge was pork prices, which surged 20.2% yoy, reversing a 6.0% decline in June as production slowed.

However, the core CPI, which excludes volatile energy and food prices and is a better measure of underlying inflation, remained weak, rising just 0.8%, slower than June’s 1.0% rise.

While the PBOC is expected to keep monetary settings loose amid sluggish growth, there are limits to how much it can ease monetary policy on concerns about capital outflows as the US Federal Reserve aggressively hikes interest rates.

The PBOC is therefore likely to rely on more targeted easing to support the recovery, even as consumer inflation tests China’s 3% tolerance level.

That means the prospect of a near-term across-the-board rate cut is slim given the ongoing global inflationary pressures and rate hikes in other major economies, said Bruce Pang, chief economist at Jones Lang Lasalle.

“Overall, CPI inflation remains below the PBOC’s target of around 3%, giving it policy space to remain accommodative,” HSBC economist Erin Xin said in a statement.

“Given the ongoing uncertainty surrounding COVID-19 clusters, as well as weak real estate market sentiment, the PBOC needs to remain accommodative.”

editing by Sam Holmes; Editing by David Holmes and Clarence Fernandez

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