Employees make suits at a factory operated by the Shandong Ruyi Technology Group in Jining, China. (Photographer: Qilai Shen/Bloomberg)

China’s Factory Deflation Improves as CPI Muted in Profit Boost

(Bloomberg) -- China’s factory-gate deflation eased to the least in four years while consumer prices remain muted, giving policy makers fresh evidence that the price outlook is stabilizing along with demand.

Key Points

  • Producer-price index improved for an eighth straight month, falling 0.8 percent in August from a year earlier, the National Bureau of Statistics said Friday, less than the 0.9 percent drop projected by economists in a Bloomberg survey. 
  • Consumer-price index rose 1.3 percent, trailing estimates for a 1.7 percent rise.
  • The CPI gauge for food rose 1.3 percent, the least since January 2015.
China’s Factory Deflation Improves as CPI Muted in Profit Boost

Big Picture

China is steadily putting the worst of its factory-gate deflation behind it, after year-on-year declines of almost 6 percent late last year, helping boost corporate profitability. With the People’s Bank of China holding its main interest rates steady for almost a year now, economists were divided on what the inflation data meant for the monetary outlook.

Economist Takeaways

"It should give policy makers even greater scope to ease if needed, although monetary conditions at the current juncture are already quite accommodative," said Julia Wang, an economist at HSBC Holdings Plc in Hong Kong. "Strong import data from yesterday suggest that domestic demand continues to stabilize, and this will further support prices in the next few months."

Consumer inflation will pick up in coming months while PPI is poised to turn positive by the end of the year, according to Ding Shuang, the head of Greater China economic research at Standard Chartered Plc in Hong Kong. "I believe the PBOC also expects a rebound of CPI inflation, and therefore I don’t expect a rate cut, although the central bank may continue to keep liquidity adequate to prevent a rise in funding costs," Ding said.

"With raw material prices holding up, it bodes well for industrial profit," said Raymond Yeung, chief greater China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. "As deflationary risk has substantially diminished, the PBOC will not need to ease further and is expected to adopt a neutral stance."

"Low CPI will ease pressure on the central bank and reduce any constraint on monetary easing" while the PPI will likely turn positive in the next few months, said Zhu Qibing, chief macro economy analyst at BOCI International (China) Ltd. in Beijing. Narrowing factory deflation along with a low CPI will "definitely give a support to company profitability."

China’s Factory Deflation Improves as CPI Muted in Profit Boost

The Details

  • The slower increase in consumer prices was mainly due to food prices, according to a statement from the NBS that was released along with the data.
  • Pork prices, a substantial component of the CPI basket, rose 6.4 percent from a year earlier, after surging 34 percent in both April and May
  • Eggs prices dropped 7.4 percent while fruit prices fell 0.6 percent.
  • Non-food prices increased 1.4 percent.
  • Mining producer prices fell 3.2 percent, less than half the 8.2 percent drop in June. 
  • Raw materials prices slipped 2.3 percent, less than June’s 6.1 percent retreat.

With assistance from Xiaoqing Pi