China’s Consumer Prices Head for Deflation as Pork Prices Slump

(Bloomberg) -- China’s consumer inflation threatens to drop below zero in coming months as pork prices reverse trend from last year’s surge.

The consumer price index rose 0.5% in October from a year earlier, the slowest pace since late 2009 and the first time it’s been below 1% in more than three years, according to data released by the National Bureau of Statistics Tuesday. The median estimate in a Bloomberg survey was for a 0.8% increase.​

Factory prices are already in deflation, with the producer price index declining 2.1% on year, the same pace as in September. Core inflation, which removes the more volatile food and energy prices, was unchanged at 0.5%.

Pork prices rocketed last year after African Swine Fever decimated China’s pig herd. Record imports and the slow recovery in pig numbers this year are now starting to drive down prices, with wholesale costs falling in October and pork prices in the CPI declining 2.8% -- the first contraction since February 2019. Overall food inflation weakened considerably to 2.2% in October from 7.9% in the previous month.

What Bloomberg Economics Says...

“Weaker food prices are likely to continue to drag CPI inflation lower, with a negative reading possible around year-end or in early 2021. At the same time, we expect producer price deflation to remain well in negative territory, though it may claw back some ground toward the break-even level.”

-- David Qu, China economist

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Even with CPI heading close to zero and possibly turning negative, economists point to core inflation and non-food prices -- which were unchanged -- as reasons why policy makers probably won’t react to the data. The economy has made a steady recovery from its slump in the first half, which would help to underpin price-growth.

“Core CPI has been stabilizing for fourth months in a row, and we expect the ongoing recovery should eventually lead to a modest upswing in core CPI over the course of 2021,” said Michelle Lam, Greater China economist at Societe Generale SA. “As for policy makers, I believe they will look through the moderation in CPI, which was due to base effects, and maintain a neutral policy stance.”

China’s recovery is gaining momentum, with manufacturing expanding for the eighth straight month in October and the services purchasing managers’ index at the highest since June 2012. At the same time, weaker factory-gate prices have curbed industrial profits even though purchasing prices continue to decline.

If CPI turns negative, and PPI remains in deflation, “real interest rates will likely further rise, and downward pressure on profit growth will intensify,” Jingyang Chen, an economist at HSBC Holdings Plc, wrote in a note. “The possibility of CPI deflation in the coming months will likely prevent the People’s Bank of China from tightening its policy stance by year-end.”

©2020 Bloomberg L.P.

With assistance from Bloomberg