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China’s Pork Prices Take Flight as Economy Holds Inflation Down

China’s Pork Prices Take Flight as Economy Holds Inflation Down

(Bloomberg) --

China’s ongoing swine fever outbreak is causing havoc for consumers in the form of runaway price gains for pork, but less of a headache for the central bank that’s more focused on emerging deflation risks.

Inflation data released Tuesday showed that pork prices rose 46.7% from a year earlier in August, almost 20 percentage points higher than in the previous month. At the factory gate though, prices contracted 0.8% in August. The headline rate of consumer price gains held steady at 2.8%, with a gauge of inflation excluding food and energy slipping to 1.5%.

China’s Pork Prices Take Flight as Economy Holds Inflation Down

That combination of product-specific inflation plus weakening price gains elsewhere means that while swine fever is a political issue that China’s policy makers are stepping up their response to, it’s far from being a constraint on supportive monetary policy from the central bank. As pork plays a declining role in the basket of goods used to calculate the consumer price index, it’s not as much as a problem for broad purchasing power as it once would have been.

“Policymakers will be willing to look through high pork prices and continue with easing,’’ said Michelle Lam, greater China economist at Societe Generale SA in Hong Kong. “Weakening domestic demand is weighing on downstream price pressure.’’

There are still risks ahead. The effects of African swine fever decimating China’s herd may push overall price rises as high as 3.9% by the end of the year, according to analysis by Bloomberg Economics’ David Qu. That’s

However, even though the People’s Bank of China aims to keep the consumer price index below 3%, that spike may not prompt them to take action and tighten policy. Average CPI gains are forecast by economists in a Bloomberg survey to come in at 2.4% for 2019.

There is also a limit to what the central bank can do to deal with a supply problem such as a food shortage. While the government is stepping in to assist building new hog farms and increase supply, with no indication that fever has been bought under control, that may make the problem worse.

Sluggish Economy

Another reason is that the consideration about overall prices is less important than the outright deflation seen in producer prices, and the sluggish inflation seen in non-food CPI. With domestic demand weakening and oil prices falling, non-food inflation will remain low, according to Bloomberg’s Qu.

"We don’t think the pork-price-driven CPI inflation will have a significant impact on the PBOC’s monetary policy stance because the pork price inflation is caused by a supply shock, and China’s PPI inflation is turning negative due to weakening growth," according to Lu Ting, chief China economist at Nomura International Ltd. Lu revised up his forecast for pork prices this year, but kept the outlook for CPI unchanged at 2.5%.

So although households may complain more about rising food prices and CPI will likely get faster later in the year, it’s unlikely that there will be a drop off in calls for the PBOC to add stimulus.

The government is taking notice though.

Vice Premier Hu Chunhua recently called the situation “much grimmer than we have been informed,” and told officials to take immediate steps to increase supplies. “If pork prices continue to rise too fast, it will seriously affect the lives of urban and rural residents, especially low-income people, and affect the joyful atmosphere when celebrating the 70th anniversary of the founding of New China,” he said.

--With assistance from Yinan Zhao, Miao Han and Kevin Hamlin.

To contact Bloomberg News staff for this story: James Mayger in Beijing at jmayger@bloomberg.net

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

©2019 Bloomberg L.P.

With assistance from Bloomberg