Chinese Inflation Slows as Virus Hurts Demand and Oil Slumps

(Bloomberg) -- China’s consumer inflation slowed to the weakest pace since October last month as food and oil prices moderated and shutdowns to beat the coronavirus kept demand depressed.

The consumer price index rose 4.3% in March from a year earlier, the National Bureau of Statistics said Friday. That compares to the median estimate of a 4.9% increase. Factory-gate prices declined 1.5%, versus a forecast 1.1% drop.

The world’s second-largest economy gradually reopened for business in March following strict closures to stop the spread of the coronavirus, and supply constraints on some foodstuffs eased while global oil prices plummeted. That’s taken some pressure off households who had suffered both rising prices and joblessness, and eases the task for officials seeking to loosen monetary policy.

“The CPI moderation is more than we expected,” said Liu Xuezhi, an economist at Bank of Communications in Shanghai, who pointed to pork, fruit and vegetables plus oil as the drivers behind the slowdown. “Demand is also weaker due to the pandemic,” he said.

Sufficient market supply has pushed down the prices of eggs, seafood and fruit, while the oil price plunge in the month slashed the price of diesel oil and gasoline, the NBS said. Air tickets prices dropped 28.5% due to a collapse in demand for travel during the virus shutdowns.

What Bloomberg’s Economists Say...

China’s slack inflation data for March lower the hurdle for further easing by the People’s Bank of China. Overall inflation will continue to slow, with the CPI easing and the PPI staying in deflation.

David Qu, economist

See here for full note

Pork prices, a key element in the country’s CPI basket and a source of inflation due to a previous swine fever outbreak, rose 116.4% on the year, slower than February’s record 135.2% gain. Grain prices were flat, according to the release. There have been concerns that other countries could limit exports to ensure domestic supplies during the virus pandemic.

More Stimulus

While food and commodities helped push down China’s inflation, underlying price pressures remained muted. Core inflation, which removes the more volatile food and energy prices, accelerated to 1.2% from a year earlier after 1.0% in February. Core prices however fell from February.

Overall, demand fell in China in February and March as the outbreak raged and is now starting to pick up as the virus has been brought under control. However, the spread of the outbreak globally will now damage demand overseas and is likely to hurt Chinese exports.

“Deflationary risks are more of a threat to both China and the world in the upcoming years as demand will likely stay sluggish in a low-growth environment,” said Nie Wen, economist at Huabao Trust Co. in Shanghai. “For policy makers, deflation is more difficult to tackle than inflation.”

Factory gate prices are already in deflation and the outlook is worsening, which will weigh on manufacturers’ profits and their ability to pay both wages and their debts.

“The economy is now suffering from a broad drop of prices from food to various services due to the coronavirus outbreak,” said Xing Zhaopeng, an economist at Australia and New Zealand Banking Group in Shanghai. “Factories will be severely affected by the decreasing output prices,” he said, and added that more government stimulus is needed.

©2020 Bloomberg L.P.

With assistance from Bloomberg