Deflationary pressures are easing in China, and further steps are expected to stimulate demand

  • August CPI +0.1 y/y, versus -0.3 in July
  • Producer Price Index for August -3.0 y/y vs. -4.4 in July
  • Deflationary pressures eased amid signs of stabilizing growth
  • Further policy steps are expected to stimulate demand

BEIJING (Reuters) – China’s consumer prices returned to positive territory in August while factory-door price declines slowed, data showed on Saturday, with deflationary pressures easing amid signs of stabilization in the economy.

But analysts say more policy support is needed to support consumer demand in the world’s second-largest economy, with a slowdown in the labor market recovery and uncertainty over household income prospects.

The National Bureau of Statistics said its consumer price index rose 0.1% in August from a year earlier, slower than the median estimate for a 0.2% increase in a Reuters poll. The CPI fell 0.3% in July.

The core inflation rate, which excludes food and fuel prices, was unchanged at 0.8% in August.

The Producer Price Index (PPI) fell 3.0% from a year earlier, in line with expectations, after falling 4.4% in July. The decline in factory prices was the smallest in five months.

Reuters graphics

“There is little improvement in the inflation profile. Meanwhile, the PPI deflation seems to be narrowing, indicating a slow and moderate recovery,” said Zhou Hao, chief economist at Guotai Junan International.

“In general, inflation (rate) still indicates weak demand and requires further policy support in the foreseeable future.”

The bureau said food prices fell 1.7% year-on-year while non-food costs rose 0.5% – led by higher tourism-related costs.

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Recent floods have damaged corn and rice crops in the main grain-producing belt in northern China, raising fears of domestic food price inflation as consumers around the world face food shortages caused by the war in Ukraine.

“Both the CPI and PPI are likely to show modest improvements in the fourth quarter,” said Luo Yunfeng, an economist at Huajin Securities.

Shrinkage pressures

The statistics office said that compared with the previous month, the consumer price index rose 0.3%, up from 0.2% in July.

Pork prices increased by 11.4% on a monthly basis, compared to no change in July, due to the impact of severe weather in some regions. They fell 17.9% from a year earlier, narrowing from a 26% decline in July.

The statistics office said factory door contraction eased in August due to improved demand for some industrial products and higher global crude oil prices.

China’s meager price changes stand in sharp contrast to the rise in inflation most other major economies have seen since the COVID-19 pandemic diminished, forcing their central banks to quickly raise interest rates.

China in July became the first G20 country to report a year-on-year decline in consumer prices since Japan’s last negative CPI reading in August 2021.

Trade data for August showed that China’s exports and imports pared declines, joining a series of other indicators that show a possible stabilization in the economic slowdown, as policymakers seek to stimulate demand and fend off deflation.

“With early signs of growth stabilizing, we see deflationary pressures easing, a trend reflected in higher commodity prices in August,” ANZ analysts said in a note.

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Beijing has announced a series of measures in recent months to support growth, including mortgage interest rate cuts and the easing of borrowing rules last week by authorities to help homebuyers.

Bruce Pang, chief economist at Jones Lang LaSalle, said China’s central bank could continue to cut interest rates and bank reserve requirement ratios.

Premier Li Qiang said this week that China is expected to achieve its 2023 growth target of about 5%, but some analysts believe the target may not be achieved due to a worsening real estate decline, weak consumer spending and declining credit growth.

(Reporting by Kevin Yao and Joe Cash – Prepared by Mohammed for the Arabic Bulletin) Editing by Sam Holmes and William Mallard

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Joe Cash reports on China’s economic affairs, covering domestic fiscal and monetary policy, key economic indicators, trade relations, and China’s growing engagement with developing countries. Before joining Reuters, he worked on UK and EU trade policy in the Asia-Pacific region. Gu studied Chinese at Oxford University and speaks Mandarin.

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