China Consumer & Producer Prices (Dec.) - Capital Economics
China Economics

China Consumer & Producer Prices (Dec.)

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Headline inflation returned to positive territory last month as the drag from pork prices eased. Broader price pressures also edged up on the back of stronger demand. With underlying inflation likely to continue rising, we think policymakers will look through the swings in food prices and tighten policy this year.

Consumer price deflation reverses as food prices rise

  • Headline inflation returned to positive territory last month as the drag from pork prices eased. Broader price pressures also edged up on the back of stronger demand. With underlying inflation likely to continue rising, we think policymakers will look through the swings in food prices and tighten policy this year.
  • Consumer price inflation rose from -0.5% y/y in November to +0.2% last month (the Bloomberg consensus was 0.0%, our forecast was +0.4%). (See Chart 1.) Most of the increase was the result of a rise in food price inflation. After falling for several months, pork prices jumped 6.5% m/m amid tighter restrictions on imported meat. Prices are still lower than a year ago when pork supply was even tighter due to African Swine Fever, but the y/y contraction eased from -12.5% to -1.3% last month. (See Chart 2.)
  • Meanwhile, demand-side price pressures strengthened last month. Admittedly, core consumer price inflation fell a touch from +0.5% y/y to +0.4%, but in m/m terms prices stabilised following falls in previous months. And higher energy prices nudged up non-food inflation. (See Chart 1 again.) Meanwhile, the contraction in producer prices eased from -1.5% y/y to -0.4% (Bloomberg -0.8%, CE -1.2%). In m/m terms, factory gate prices rose +1.1% last month, the fastest pace since December 2016. (See Chart 3.) A further strengthening of demand and rise in industrial commodity prices last month continued to drive the recovery in the price of manufactured goods. (See Chart 4.)
  • Consumer prices may slip back into deflation over the next couple of months due to a jump in pork prices a year ago, but this should prove temporary. With economic activity set to remain strong and underlying inflation likely to rebound, we think the PBOC will tighten policy this year.

Chart 1: Consumer Prices (% y/y)

Chart 2: Consumer Prices (% y/y)

Chart 3: Producer Prices

Chart 4: Producer Prices (% y/y)

Sources: CEIC, Capital Economics


Julian Evans-Pritchard, Senior China Economist, julian.evans-pritchard@capitaleconomics.com
Sheana Yue, Assistant Economist, sheana.yue@capitaleconomics.com