China’s inflation remains subdued on lockdowns, commodity prices

CHINA’S consumer inflation remained subdued in September as lockdowns continued to impact spending habits, while soft commodity prices kept producer inflation in check.

The consumer price index (CPI) rose 2.8 per cent last month from a year earlier, the National Bureau of Statistics (NBS) said on Friday (Oct 14), a rise largely driven by pork prices. While that was the highest since April 2020 and up from 2.5 per cent in August, it was marginally weaker than the median forecast for a 2.9 per cent increase in a Bloomberg survey of economists. Core inflation, which excludes volatile food and energy costs, slowed to 0.6 per cent from 0.8 per cent in August, the weakest pace since March 2021.

Factory-gate inflation slowed to 0.9 per cent from 2.3 per cent in August, lower than the 1 per cent expected in the survey.

With core CPI slipping, “China is heading to an era of deflation as economic activity is waning”, said Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group.

Chinese stocks climbed in early trading amid a rebound in global shares. However, the benchmark CSI 300 Index’s 1.7 per cent gain trailed that of the broader Asian equities gauge.

China’s consumer inflation has been relatively subdued this year in comparison with the soaring prices seen in other major global economies where central banks have raised interest rates repeatedly to tame costs. A private survey published last month warned the country faces increasing risks from deflation as demand crumbles under the weight of an ongoing property crisis and is threatened by continued Covid restrictions.

The weaker core inflation “shows that recovery in effective demand is weak, and there is a lag in passing prices down the supply chain”, said Bruce Pang, chief economist at Jones Lang Lasalle. “Slack demand, recovering at a slower pace than manufacturing, is the chief issue right now.”

While Pang said he saw no risk of deflation in the short term, he added that there are “some characteristics of structural deflation” as demand weakens.

Still, the government has emphasized stability. At a Group of 20 meeting of central bank governors on Thursday, People’s Bank of China governor Yi Gang called consumer prices “basically stable”. And alongside the release of Friday’s data, NBS chief statistician Dong Lijuan said in a statement that authorities “took many steps to ensure the supply of important consumer goods and stabilize their prices” last month.

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The headline CPI figure, meanwhile, was driven by higher food prices, with pork climbing 36 per cent in September from a year earlier, higher than August’s 22.4 per cent gain. The government has been releasing frozen pork from its massive state reserves in an attempt to keep prices under control. High temperatures also led to elevated vegetable and fruit prices.

The slowdown in producer inflation was driven by a slump in prices of mining, raw materials and manufacturing.

“Prices of global commodities including crude oil continued to decline in September,” Dong from the NBS said. “The overall price trend for producer goods is downward, though the declining trend has slowed.”

The nation’s adherence to Covid Zero has stifled consumption and kept demand in check, while an ongoing property crisis has also weighed on confidence. Residents are experiencing the worst job market prospects on record, according to a recent central bank survey. And household savings have soared as people remain pessimistic about the future.

Tourism revenue over this month’s extended National Day holiday, meanwhile, fell to less than half of pre-pandemic levels as strict Covid rules discouraged movement in the lead up to the Communist Party congress. Economists will be watching how policy is shaped at the event, and how much President Xi Jinping chooses to emphasise or diminish the importance of economic development. BLOOMBERG