China’s Pork-Driven Deflation Unlikely to Push PBOC Off Course
China’s Consumer Prices Decline for First Time Since 2009
(Bloomberg) -- China’s central bank is likely to look through the first deflation in consumer prices in over a decade, economists said, as it keeps its focus on bringing debt under control.
Consumer prices fell 0.5% in November from a year earlier -- the first contraction since October 2009 -- the National Bureau of Statistics said Wednesday. That was far weaker than the 0% median forecast in a Bloomberg survey of economists.
The fall was largely driven by a cyclical decline in the price of a single commodity, pork, after supplies recovered from last year’s swine disease. As such, the inflation slump is seen as temporary and unlikely to deter the People’s Bank of China from its stated aim of gradually reducing the pace of credit growth in order to stabilize debt levels in the economy and prevent a rapid rise in house prices.
“The question for the markets is whether the PBOC might slow the policy neutralization process due to extremely low inflation,” said Zhou Hao, an economist at Commerzbank AG in Singapore. “For now, it seems unlikely as the Chinese policy makers have already stepped up deleveraging measures and started the property tightening.”
Inflation has been on a steady downward path in recent months, largely due to an easing of food costs. Pork prices -- a key element in the CPI basket -- surged last year when African Swine Fever decimated China’s pig herd. China imported a record amount of pork this year to cope with the shortage, while its domestic production is recovering too, driving down prices.
Economic Recovery
Food prices fell 2% in November from a year ago, while pork prices plunged 12.5%, data from the statistics office showed.
Xing Zhaopeng, a markets economist at Australia & New Zealand Banking Group in Shanghai, said it’s unlikely that consumer deflation will persist, given “higher crude prices and the coming peak season of travel before the New Year.”
“Inflation will not be a restriction to monetary policy, as both CPI and PPI are expected to improve gradually on a month-on-month basis from now on,” he said.
China’s strong economic recovery will likely add to price pressures. Exports surged more than 20% last month, while the purchasing managers’ index reached a three-year high. That could push up the core inflation measure, which strips out the more volatile food and energy prices and has remained at 0.5% since July.
Factory deflation also eased, with the producer price index declining 1.5% on year, compared with a 2.1% decrease in October. The median estimate in a Bloomberg survey of economists was -1.8%.
What Bloomberg Economics Says...
“The CPI deflation is likely to extend into early 2021. A key issue will be how the price trends affect activity more broadly. Factory-gate deflation has been a check on the recent pickup in industrial profits. Now, falling consumer prices could be another risk to earnings. For the People’s Bank of China, this would be a non-negligible consideration.”
-- David Qu, China economist
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China’s CSI 300 Index was little changed near a five-year high after the data, while the currency remained near its strongest since mid-2018. Government bonds, which are typically more sensitive to shifts in inflation because of how it affects future interest, were also little changed Wednesday.
Economists warned that falling prices could be harmful amid the recovery if consumers and businesses delay purchases in anticipation of lower prices.
“In general, negative inflation would indicate insufficient domestic demand, a situation that will limit further acceleration of production and therefore of GDP,” Dariusz Kowalczyk, chief China economist at Credit Agricole CIB, said before the inflation report. “It’s also important to pay attention to core inflation, hovering around 10-year lows, which presents a better picture of economic conditions.”
©2020 Bloomberg L.P.
With assistance from Bloomberg