Factory prices in China suffer first drop since December 2020 as COVID restrictions take their toll

  • Oct PPI falls for the first time since December 2020
  • October CPI growth slows from 29-month high
  • Data highlights weakening demand as COVID curbs hurt economy
  • Analysts say China faces increased deflationary pressure on weak demand

BEIJING, Nov 9 (Reuters) – China’s factory gate prices for October fell for the first time since December 2020, and consumer inflation moderated, underscoring faltering domestic demand as restrictions COVID strictures, a real estate crisis and the risks of a global recession have hammered the economy.

Analysts say struggles for businesses and consumers both at home and abroad will put deflationary pressure on China over the coming months, with aggressive global interest rate hikes and war in Ukraine adding to Beijing’s challenge.

The producer price index (PPI) fell 1.3% year on year, reversing from a 0.9% gain a month earlier, data from the National Bureau of Statistics showed on Wednesday. (NBS), and compared to a forecast of a contraction of 1.5% in a Reuters poll.

Consumer inflation also moderated after hitting a 29-month high in September, and underlying price pressures remained much more subdued, with core inflation rising 0.6% in October, unchanged from September.

“Headwinds such as weak domestic demand and slowing exports will make China wary of a slide into deflation, signaled by its subdued core CPI reading below 1.5% growth. for more than two years,” said Bruce Pang, chief economist and head of research. at Jones Lang Lasalle Inc.

The deflationary impulse in the producer price gauge partly reflects sharply higher levels a year ago and falling commodity prices, according to a statement from the BES.

Prices in the coal mining and washing industry fell 16.5%, after falling 2.7% the previous month, while those in ferrous metal smelting and rolling fell by 21.1% after an 18.0% drop in September.

The world’s second-largest economy has been hampered this year by a recurrence of COVID-19 outbreaks, forcing authorities to roll out strict anti-virus measures in a blow to factory and consumer activity.

China’s trade engine has also taken a hit, with both exports and imports falling in October, and economists warning of further weakness in coming quarters due to domestic pressure and global recession risks. . Read more

“The sharp divergence between PPI inflation in China and other industrial countries means that China could gain a competitive edge in manufacturing that could help support Chinese exports,” Nomura analysts said in a note. to customers.

“However, deteriorating global growth is weighing on external demand.”

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The consumer price index rose 2.1% from a year earlier, after hitting a 29-month high with a 2.8% increase in September, mainly due to falling prices food. It was also slower than the 2.4% expected by analysts.

Food prices rose 7.0% on an annual basis, a slowdown from an 8.8% rise the previous month, with prices for fresh vegetables down 8.1% from a 12.1% rise. % in September.

However, pork prices – a key driver of the CPI – rose 51.8% year-on-year in October, faster than September’s 36% growth.

Nearly three years into the pandemic, China has pledged to continue its strict COVID-19 containment strategy. Analysts say policymakers will be cautious in easing monetary policy for fear of capital flight amid massive hikes in global interest rates, led by the Federal Reserve.

China’s currency, the yuan, has already been hit this year by the global tightening trend and the strength of the US dollar, reducing the room for any major policy action by the People’s Bank of China.

“The bottom line is that inflation is unlikely to become a major policy constraint in China,” said Julian Evans-Pritchard, senior China economist at Capital Economics.

“That said, there are currently other impediments to monetary easing, such as the PBOC’s efforts to slow the renminbi’s depreciation against the US dollar.”

The International Monetary Fund said last month that it expects China’s growth to slow to 3.2% this year, down 1.2 points from its April projection, on expectations of a gradual lifting of strict COVID-19 restrictions next year, but no quick resolution of the real estate crisis. Read more

Reporting by Liangping Gao and Liz Lee Editing by Shri Navaratnam

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