China's consumer inflation up 2.5% on food price gains; factory-gate inflation hits 4-month high

[BEIJING] China's consumer inflation accelerated to the fastest pace in six months, driven by surging food prices, while producer prices escaped from near the deflation zone on a recovering economy, data from the National Bureau of Statistics (NBS) showed on Thursday.

The consumer price index (CPI) increased 2.5 per cent in April from a year earlier, more than the 2.3 per cent rise in the March and in line with market expectations, as pork prices remained elevated due to supply issues from a growing swine fever epidemic.

China's producer price index (PPI) gained 0.9 per cent year-on-year in April, its fastest pace in four months, buoyed by higher commodity prices and a sign that demand may be starting to perk up as Beijing rolls out more stimulus.

April's PPI increase picks up from a 0.4 per cent rise in March, rising for the second month and exceeding economists' estimates, soothing fears that it will sink back to deflation. Analysts polled by Reuters had expected factory-gate inflation to nudge up to 0.6 per cent in April.

"This is great news for China as it shows recovery is working, especially the PPI number," said Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis SA in Hong Kong. "But the People's Bank of China will clearly remain more cautious."

Still, domestic consumer demand is not yet robust. Core CPI, a gauge excluding the more volatile food and energy prices, pulled back to 1.7 per cent in April from 1.8 per cent a month earlier.

Analysts and investors are closely watching inflation gauges in China to see whether there has been real improvement in underlying demand, which would support industrial profits and investment.

The pick-up in producer inflation suggests the world's second-largest economy may slowly be responding to support, as authorities seek to head off external risks such as trade tensions with the United States, which unexpectedly escalated this week.

However, some analysts remain concerned about the true state of the demand factors driving China's economy.

"Looking ahead, higher food inflation will probably continue to push up CPI in the coming months," Capital Economics senior China economist Julian Evans-Pritchard said. "But with economic growth unlikely to stage a strong recovery and industrial commodity prices likely to drop back before long, we don't anticipate much upside to PPI and non-food CPI."

Most of the PPI gain was driven by ferrous metal ore mining, with prices rising 10.6 per cent on-year, up from 5.8 per cent in March.

To arrest a sharper slowdown of the economy, Beijing has fast-tracked big-ticket infrastructure projects, which are pushing up prices of construction materials.

Imports of copper, widely used in construction and manufacturing, also rose in April from March.

On a monthly basis, producer prices inched up 0.3 per cent, for the second consecutive month after a marginal step-up in March.

Stronger factory-gate price rises have bolstered profits for industrial firms, which saw earnings rebound from four months of contraction in March.

China's economy posted surprisingly strong data in March, stoking debate over how much more stimulus China needs to generate a sustainable recovery, however, initial April readings have been more subdued.

HIGHER FOOD PRICES

Food prices were up 6.1 per cent, with prices for fresh vegetables up 17.4 per cent and pork prices jumping 14.4 per cent, the most since mid-2016.

China has slaughtered millions of pigs since August, when the viral African swine fever was first reported in China, pushing up pork prices.

Domestic demand is also recovering amid months of stimulus, which supported demand for commodities from copper to crude oil.

"The hog cycle could drive China's headline CPI closer to 3 per cent for the coming quarter but it will not constrain People's Bank of China's policy," Robin Xing, chief China economist at Morgan Stanley, told Bloomberg Television.

"On the PPI front we've seen some improvement on the rebound in the infrastructure demand."

Yao Shaohua, an economist at ABCI Securities in Hong Kong, said inflation pressure won't be a big concern in China's monetary policy this year, as long as the consumer price growth doesn't hit the official target of 3 per cent.

BLOOMBERG, REUTERS