China's inflation pressures ease, adding to rate cut calls

[BEIJING] China's inflation pressures moderated in December as commodity prices and food costs slid, giving policy makers scope to cut interest rates to cushion the economy's downturn.

The producer price index rose 10.3 per cent from a year earlier, down from November's 12.9 per cent, while the consumer price index increased 1.5 per cent, compared with 2.3 per cent in November. Both came in lower than economists' expected.

The inflation surprise adds further impetus to calls for the central bank's first cut in its key policy interest rate since April 2020, possibly as early as next week. Authorities have shifted to a more pro-growth bias this year as a property market slump and repeated virus outbreaks threaten the outlook.

"The probability of a rate cut in the first quarter is high, and the closest window is this month," said Bruce Pang, head of macro and strategy research at China Renaissance Securities Hong Kong.

Consumer inflation "will not be a concern in 2022" and the core measure, which strips out volatile food and energy costs, will stay muted below 1.5 per cent, he said.

The central bank has already freed up cheap long-term funding for banks, while the government has brought forward debt sales in an attempt to speed up fiscal spending.

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The government took a number of measures recently to curb sharply rising energy and raw materials prices, with signs they could be having a desired effect.

However, the emergence of Omicron-variant virus cases is likely to be a defining factor in coming weeks, given that China is the world's biggest producer and consumer of raw materials. If the outbreak continues to spread, some supply-side disruptions could ensue.

The takeaway from the December retreat in China's factory-gate and consumer price inflation: the central bank can rest easy if - as we expect - it adds more stimulus to support the economy, said Eric Zhu, China economist at Bloomberg Economics.

"Producer price inflation eased for a second consecutive month, while consumer price inflation dropped back below 2 per cent."

Consumer inflation remained subdued as virus control measures impeded consumption and weighed on demand, especially for prices of services. Core CPI rose 1.2 per cent, the same as in November.

"The favourable inflation trend provides the time window for monetary easing. We expect the People's Bank of China to cut the medium-term lending facility rate in the coming months," said Zhaopeng Xing, an economist at Australia & New Zealand Banking Group.

China's tech-heavy ChiNext Index rose as much as 2.2 per cent after the inflation data was released, it's steepest gain since Nov 22. The gauge had been falling every day since the new year.

Food prices fell in December, with pork prices dropping almost 37 per cent and vegetable price gains slowing. The spread of the more transmissible Omicron variant threatens to temporarily drive prices up again if strict mobility restrictions are widened.

The upcoming Chinese New Year holidays will also see a surge in demand for staple foods and thus higher prices.

For the full year, factory gate prices rose 8.1 per cent, while consumer prices increased 0.9 per cent.

Economists expect consumer prices to grow 2.2 per cent in 2022, and factory-gate prices to gain 4 per cent for the full year, according to the median estimates in a Bloomberg survey.

BLOOMBERG