China’s Pork Crisis Risks Sending Inflation to 4% by Next Year

(Bloomberg) --

China’s monthly consumer inflation could hit 4% by early 2020 on the back of surging pork prices, complicating the central bank’s efforts to support the economy further, economists said.

The consumer price index rose 3% in September from a year earlier, hitting the government’s inflation target for 2019. The pressure for prices to go up continues to mount though, as the number of breeding sows continues to shrink sharply, according to economists at China International Capital Corp. and Lianxun Securities Co.

Headline inflation is therefore likely to hit 4% in December or January 2020 due to a low base, they said. The last time China had CPI rising 4% or above was in 2012. Economists surveyed by Bloomberg see average CPI inflation at 2.4% in 2020.

China had about 19 million sows in stock at the end of last month, compared with a five-year average of 34 million, according to data from Shanghai JC Intelligence Co., a consultancy firm specialized in agricultural commodities.

“It is too early to pinpoint the likely ‘peak’ for this round of pork price inflation,” Eva Yi, senior economist at CICC, wrote in a note. “Higher than expected inflation may become one of the impediments to sizable outright easing in the near term,” and there may be more room for fiscal easing compared with outright monetary loosening, she said.

While the country’s core inflation is stable, the pork-driven inflation has become a concern for policy makers for fears it’d drive up the price of other meats and protein-based food products and harm households’ ability to consume. Meanwhile, deflation in factory prices is hurting company profits and making debt repayment harder.

The People’s Bank of China announced cuts in the amount of funds banks have to hold in reserve in September, but officials have held off reducing broad borrowing rates.

“Rising food prices affects people’s livelihood, so it will impact how much monetary policy can loosen,” Li Qilin, macroeconomic economist at Lianxun Securities Co., wrote in a note. The case for a cut in the reserve ratios is therefore bigger than a cut to interest rates, he said.

To contact Bloomberg News staff for this story: Yinan Zhao in Beijing at yzhao300@bloomberg.net

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, James Mayger

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With assistance from Bloomberg