A worker walks past steel coils at the Chongqing Iron and Steel Plant in Changshou, Chongqing, China, August 6, 2018. REUTERS/Damir Sagolj/File Photo
Sign up now for FREE, unlimited access to Reuters.com
Sign up
- July producer inflation is the lowest since February 2021
- Consumer inflation in July is the highest in two years
- PBOC is considered to remain accommodative to stimulate growth
BEIJING, Aug 10 (Reuters) – China’s factory-gate inflation eased to a 17-month low in July, defying global cost pressures as slower domestic construction weighed on commodity demand, although consumer price increases hit a two-year high as pork supplies tightened.
The producer price index (PPI) rose 4.2% year-on-year, the National Bureau of Statistics (NBS) said on Wednesday, compared with a 6.1% increase in June and the average forecast of 4.8% analysts.
China’s producer price growth has slowed from a 26-year high in October last year, giving policymakers room to stimulate the ailing economy, even as banks central banks elsewhere are scrambling to curb rampant inflation with aggressive interest rate hikes.
Sign up now for FREE, unlimited access to Reuters.com
Sign up
The consumer price index (CPI) rose 2.7% from a year earlier, the fastest pace since July 2020, but below forecasts for a 2.9% gain.
The government has set an annual consumer inflation target of around 3%, while Premier Li Keqiang said last month that China could keep 2022 price rises below 3.5 %, in an attempt to highlight the need to stabilize prices and employment.
“If we can keep the unemployment rate below 5.5% and the CPI increase stays below 3.5% for the whole year, we can live with a slightly higher or lower growth rate on target, not too low, of course,” Li said. he said in a discussion with business leaders organized by the World Economic Forum.
While China’s relatively benign inflation has largely been driven by weak domestic demand, a moderation in global price pressures, such as falling oil prices, also contributed to July’s slowdown.
“Factory gate inflation will remain on a downward trajectory for the rest of the year amid a further decline in commodity prices, easing of supply bottlenecks and a higher basis of comparison,” Zichun Huang, China economist at Capital Economics, said in a research note.
In a sign of the slowdown, the PPI fell 1.3% month-on-month in its first monthly decline since January, with the biggest declines in metals and petrochemicals.
In annual terms, prices in the coal mining and washing industry increased by 20.7%, decelerating by 10.7 percentage points from June, while the oil and gas extraction industry increase by 43.9%, a drop of 10.5 percentage points, the NBS said in a separate statement.
POSSIBLE FALL
Input prices fell in July, China’s official purchasing managers’ index showed last week, due to a drop in energy and raw material costs and pointing to an eventual fall in producer prices . Read more
The world’s second-largest economy slowed sharply and narrowly escaped 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 changes in domestic and external inflation while balancing economic growth and price stability.
ANZ analysts expect consumer prices to rise further in the coming months, peaking at around 4% in September, but full-year inflation could be 2.4%.
In July, the main driver of consumer prices was food inflation, which rose 6.3% year-on-year, accelerating from June’s 2.9% increase.
Pork prices drove the broader increase in food, rising 20.2% year-on-year, reversing a 6.0% decline in June as production slowed.
However, core CPI, which excludes volatile energy and food prices and is a better gauge of core inflation, remained soft, rising just 0.8%, slower than the increase in ‘1.0% in June.
While the PBOC is expected to keep the monetary setting loose amid sluggish growth, there are limits to how much it can ease policy due to concerns about capital outflows as the US Federal Reserve raises rates interest rates aggressively.
The PBOC is therefore likely to rely on more targeted easing to support the recovery, even as consumer inflation tests China’s 3% tolerance threshold.
That means the prospect of an across-the-board cut in near-term interest rates is low, given existing global inflationary pressures and interest 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 the policy space to remain accommodative,” said economist d ‘HSBC Erin Xin in a note.
“With continued uncertainty from COVID-19 clusters, as well as weak sentiment in the housing market, there is still a need for the PBOC to remain accommodative.”
Sign up now for FREE, unlimited access to Reuters.com
Sign up
Editing by Sam Holmes; Editing by David Holmes and Clarence Fernandez
Our standards: the Thomson Reuters Trust Principles.