China Factory Deflation Deepens in April as Recovery Slows
China’s factory deflation deepened in April and consumer price gains slowed, signaling ongoing weakness in the world’s second-largest economy.
The producer price index dropped 3.1% in the month, versus a forecast 2.5% decline. The consumer price index rose 3.3% in April from a year earlier, the National Bureau of Statistics said Tuesday. That compares to the median estimate of a 3.7% increase and a 4.3% rise in March.
The fall in consumer and producer prices inflation reflects weak demand both home and abroad and gives policy makers further cause to increase stimulus as the economy faces its worst slump in decades. Consumer price pressure will likely soften further as the effects of an earlier pig disease outbreak fade, while the factory price outlook is darkened by the collapse in global demand amid the pandemic.
“Overall, today’s data showed that price pressures continued to soften and suggested a still fragile recovery in domestic demand,” said Michelle Lam, greater China economist at Societe Generale SA in Hong Kong. “Even though credit growth is rebounding, there remains room for further People’s Bank of China easing, especially when external demand starts to disappoint.”
More insight into the pace of recovery from the first quarter slump will be available on May 15, when industrial output, unemployment and other data for April are released.
China’s central bank vowed “more powerful” policies to counter unprecedented economic challenges from the coronavirus pandemic in its quarterly monetary policy report Sunday, though without explicitly stating what measures will come next. The PBOC reiterated that prudent monetary policy will be more flexible and appropriate and it’ll keep liquidity at a reasonable level.
What Bloomberg’s Economists Say...
“Further slackening in China’s inflation in April suggests additional easing by the People’s Bank of China is needed. While these data may not be a trigger, we expect the central bank to deliver, especially with the global slump adding to downward pressure on the economy.”
David Qu, Economist
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Pork prices, a key element in the country’s CPI basket and a source of inflation owing to a previous swine fever outbreak, rose 96.9% from a year earlier, moderating from March’s 116.4% gain. Food prices, as a whole, also eased from last month, rising 14.8% from a year ago.
While food and commodities helped push down headline price gains, underlying inflation suggests that domestic demand remains sluggish. Core inflation, which removes the more volatile food and energy prices, slowed to 1.1% from a year earlier after 1.2% in March.
Factory deflation, however, is a bigger concern for policy makers. Falling factory product prices, weighed on by the oil price decline, made it hard for companies to generate profits and expand businesses. Weaker external demand also bodes ill for exporters’ outlook.
“Deflationary pressure far exceeds inflationary pressure this year and it’ll be very hard to turn it around,” said Larry Hu, Chief China Economist at Macquarie Group Ltd. “But this opens up a window for rate cuts and a deposit rate cut is just a matter of time.”
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