China Is Close to First Consumer Price Deflation Since 2009

China could post its first year-on-year decline in consumer prices in over a decade, but that trend is likely to be short-lived and have limited impact on monetary policy.

The official consumer price index hasn’t posted a negative reading since 2009, when the economy was struggling with the fallout from the global financial crisis. A government report due Wednesday will likely show zero inflation in the economy in November, according to the median estimate of economists, with at least five of them predicting a decline.

China Is Close to First Consumer Price Deflation Since 2009

Unlike the earlier deflationary period, the slowdown in consumer prices this time around is mainly being driven by the price of a single commodity: pork. After soaring last year when outbreaks of African Swine Fever reduced production of the country’s most popular meat, pork prices have gradually eased in recent months, eventually declining in October for the first time since 2019. The meat is heavily weighted in the basket used to calculate the consumer price index and so its price affects the broader index.

But like last year’s surge, the drop in pork costs and broader consumer prices will likely be temporary. Consumer spending has shown signs of growth in recent months, while producer price deflation has been easing since June as China’s economy began to recover from shutdowns due to the coronavirus pandemic.

Standard Chartered Plc’s economist Ding Shuang said he expects “shallow CPI deflation for some of the prints before March next year,” but limited action from the People’s Bank of China.

“It is quite unlikely for the PBOC to respond to a temporary CPI deflation caused by fluctuations of a single product such as pork, just as the central bank did not tighten monetary policy when CPI inflation surged in late 2019 and early 2020 due to pork prices,” he said.

The central bank has been signaling for several months already that it wants to start withdrawing the stimulus it pumped into the economy this year to deal with the pandemic. Worried about economy-wide debt-levels, the PBOC has spooked bond market investors by signaling a return to tighter monetary policy.

Weak inflation figures could postpone central bank action, but are unlikely to derail policy makers from their course.

“We believe the financial cycle may be rebalanced next year, and the macro financial environment may be characterized by credit tightening,” China International Capital Corp. economists led by Huang Wenjing wrote in a report.

Aside from pork, commodity prices in general are lower than a year ago because of weak global demand, putting downward pressure on inflation, according to Dariusz Kowalczyk chief China economist at Credit Agricole CIB, who expects consumer price inflation to remain negative for about half a year.

“The government stimulated production before consumption to deal with the pandemic, leading to excess supply vs demand,” he said.

What Bloomberg Economics Says...

“A likely deflationary CPI reading -- the first since 2009 -- would be a reminder that the recovery still requires policy support.”

-- Asia economist team

For the full report, click here.

The core inflation measure, which excludes food and energy prices, will be key to watch going forward, said Standard Chartered’s Ding. He estimated core CPI will trend up next year to pre-Covid levels of about 1.5% toward the end of 2021 from about 0.5% currently.

Consumer inflation is likely to remain subdued next year, easing to 1.8% from an estimated 2.7% in 2020, according to economists surveyed by Bloomberg.

“For monetary policy, what we can conclude is that inflation will not be a restriction,” said Xing Zhaopeng, a markets economist at Australia & New Zealand Banking Group in Shanghai.

©2020 Bloomberg L.P.

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