Producer prices are falling in China, and consumer inflation is slowing due to weak demand

  • PPI falls for the second month
  • PPI for November -1.3% yoy vs -1.3% yoy in October
  • November CPI +1.6% yoy vs +2.1% yoy in October

BEIJING (Reuters) – China’s factory gate prices showed an annual decline for the second month in November while consumer price inflation slowed, pointing to sluggish activity and weak demand in an economy hampered by tough pandemic controls.

Analysts said they expected the government to keep interest rates low and take measures to boost confidence.

The producer price index (PPI) fell 1.3% from a year earlier, unchanged from the annual contraction seen in October, according to National Bureau of Statistics (NBS) data released on Friday. That was slower than the 1.4% in a Reuters poll.

The consumer price index for November rose at the slowest pace in eight months, jumping 1.6% from a year earlier, down from the 2.1% annualized rise recorded in October, but in line with a Reuters poll.

“This data indicates that economic momentum (continues) to weaken,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management.

A high-level political meeting on Tuesday, a gathering of the ruling Communist Party’s Politburo, confirmed that in 2023 the government will focus on stabilizing growth, boosting domestic demand and opening up to the outside world.

Zhang said that although the government has relaxed epidemic controls over the past week, it will take more measures to stimulate the economy.

“The Politburo meeting … identified weak confidence as a major problem for the economy,” he said. “I expect the government to do more to boost market and household confidence. The rapid pace of reopening shows the government’s sense of urgency.”

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Growth in the world’s second-largest economy has slowed this year, affected largely by the relentless COVID-19 curb as global demand has also fluctuated.

November’s producer price deflation and moderate consumer price inflation were accompanied by record COVID-19 infections and related restrictions that disrupted production and hampered mobility.

Although markets welcome the shift in pandemic policy, economists say it will likely dampen growth over the next few months as infections increase, leading to an economic rebound only later in 2023.

Reuters graphics

The steel industry led the product contraction, with prices falling 18.7%.

Part of the explanation for the slowdown in consumer price growth has been in the food markets.

Food prices rose 3.7% from a year earlier, while the rise seen in October was 7.0%. Within the food category, pork was a factor behind moderate inflation: in November it was 34.4% higher than in the same month a year ago, but in October the year-on-year rise was 51.8%.

Core annual inflation, which excludes volatile food and energy prices, was just 0.6% in November, unchanged from October.

“Overall inflation pressure remains moderate in China, and we expect CPI inflation to be around 1.6% for 2023, down from 2.0% in 2022. Given this, monetary policy will remain accommodative over the next year,” said Hao Zhou. Chief Economist of Guotai Junan Group.

China’s central bank has kept the key one-year loan rate at 3.65% since August. It expects consumer inflation to remain moderate next year.

Additional reporting by Liangping Zhao and Liz Lee; Editing by Edmund Kellman and Bradley Perrett

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