China’s Inflation Slows as Coronavirus Locks Down Economy

(Bloomberg) -- China’s inflation slowed as the coronavirus hammers demand, with a measure of price gains that strips out food and energy prices slumping to the weakest in a decade.

Core consumer prices rose 1% in February from a year ago, the slowest pace since June 2010, and factory prices returned to deflation, with the producer price index registering a 0.4% decline on year after rising 0.1% in January. However food costs continued to soar due to rising pork prices, leaving overall consumer inflation at 5.2%, the National Bureau of Statistics said Tuesday.

Factory-gate deflation will exert downward pressure on prices globally, while the divergence in prices shows the contradictory pressures the Chinese government is facing domestically at the moment. Overall demand and inflation are slowing due to the coronavirus and an already weaker economy, but households still face higher food prices due to the effects of the African swine fever outbreak that decimated pork supplies.

“In the short term, it means that the People’s Bank of China might not ease as much as the Fed and other central banks,” according to Larry Hu, chief China economist at Macquarie Group Ltd in Hong Kong. “CPI inflation will ease in the coming months on the slowing economy and oil price crash, so PPI deflation will be the major concern later this year. As such, we expect more stimulus to come later this year.”

Factory prices would have fallen even further into deflation without higher prices for food production. Most other producer sectors saw price declines.

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Looking ahead, “prices for non-food items -- particularly services -- would remain under pressure, given that demand would be lackluster as people may continue to avoid public gatherings. At the same time, the recent decline in commodity prices would extend PPI deflation, weighing on industrial enterprises’ profits.”

David Qu, Bloomberg Economics

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Food was also the biggest contributor to consumer inflation, with most of that coming from the rise in the cost of pork, which was up the most since 2007. Food prices rose 21.9%, the most since April 2008, while pork prices, a key element in the country’s CPI basket, rose 135.2%.

China’s pork output dropped more than 21% in 2019 after outbreaks of African swine fever decimated herds. That drove up the price of the meat and other foods and these price pressures are likely to continue well into 2020. The government said earlier this month that it still aims to restore 80% of normal pork production by the end of the year.

“The slowdown in core CPI to a 10-year low suggests demand was more affected than supply,” according to Xing Zhaopeng, an economist at Australia and New Zealand Banking Group Ltd. “With the global spread of Covid-19, external demand is expected to fall as well, and the recent plunge in oil prices reinforces not only economic uncertainty but also deflationary expectations.”

--With assistance from Tomoko Sato and Miao Han.

To contact Bloomberg News staff for this story: Lin Zhu in Beijing at lzhu243@bloomberg.net

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

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