Consumer price inflation slipped further last month due to falling food prices, while subdued demand continued to weigh on factory gate prices. But food prices aside, the recent decline in inflation could be nearing an end.
Underlying inflation close to bottoming out
- Consumer price inflation slipped further last month due to falling food prices, while subdued demand continued to weigh on factory gate prices. But food prices aside, the recent decline in inflation could be nearing an end.
- Consumer price inflation fell from 3.3% y/y in April to 2.4% last month (the Bloomberg consensus was 2.7%, our forecast was 2.5%). (See Chart 1.) The fall in food prices (see Chart 2) drove 0.8%-pts of the decline. This partly reflects a stronger base for comparison, but food prices also fell 3.5% m/m. The 8% m/m decline in pork prices suggests that supply disruptions caused by African Swine Fever continue to ease. Core inflation, which excludes food and energy prices, held steady at 1.1% y/y.
- Producer price inflation also fell, from -3.1% y/y to a four-year low of -3.7% (Bloomberg -3.3%, CE -3.4%). (See Chart 3.) While producer prices also fell in m/m terms, the contraction eased from -1.4% in April to -0.4%. The change was driven by an across-the-board decline in raw materials, manufactured goods, and consumer goods price inflation. (See Chart 4.)
- The weakness in price pressures should ease in the coming months, as the ongoing ramp-up in policy stimulus drives a further recovery in activity. Admittedly, food price inflation will probably decline further during the remainder of the year, as pork prices drop back on more ample supply. This should continue to drag down headline consumer price inflation. But core inflation should bottom out before long as labour market slack diminishes and consumer spending strengthens. And a pick-up in infrastructure construction looks set to drive a rebound in producer prices, which are highly correlated with commodity prices.
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