Consumer and producer price inflation fell sharply last month, reflecting the continued weakness in demand. Price pressures are likely to ease further in the coming months, strengthening the case for additional monetary easing.
Factory-gate prices post steepest drop in over a decade
- Consumer and producer price inflation fell sharply last month, reflecting the continued weakness in demand. Price pressures are likely to ease further in the coming months, strengthening the case for additional monetary easing.
- Consumer price inflation fell from 4.3% y/y in March to 3.3% last month (the Bloomberg consensus was 3.7%, our forecast was 3.6%). (See Chart 1.) 0.7%-pts of the decline was the result of a drop in food price inflation. (See Chart 2.) This partly reflects a stronger base for comparison, but food prices also fell 3% m/m. The fall in pork prices, by 7.6% m/m, was especially pronounced and suggests that supply disruptions caused by African Swine Fever are easing. Core inflation, which excludes food and energy prices, inched down marginally.
- Producer price inflation also fell, from -1.5% y/y to a four-year low of -3.1% (Bloomberg -2.5%, CE -2.5%). In m/m terms, factory gate prices fell 1.3%, the steepest monthly drop since the Global Financial Crisis. (See Chart 3.) This is consistent with broader evidence that demand remains very weak and is recovering more slowly than output. The decline was driven by lower prices of raw materials and manufactured goods. (See Chart 4.) The weakness in PPI – which correlates with industrial profits – suggest that financial strains on industrial firms probably did not ease much in April.
- Weak employment conditions and a sharp downturn in external demand are likely to weigh on demand-side price pressures for some time. What’s more, food and energy price inflation should continue to fall in the months ahead and pull headline inflation down further. That should remove any concerns the PBOC has about the impact of monetary easing on inflation. If anything, lower inflation will increase real interest rates and strengthen the case for further rate cuts.
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