Food aside, prices continue to recover from COVID-19 downturn
- Headline consumer price inflation, weighed down by easing food price inflation, continued its decline last month. But core consumer prices rose again for the second straight month and factory gate prices continued to edge up on the back of the ongoing improvement in economic activity.
- Consumer price inflation fell from 2.4% y/y in August to 1.7% last month (the Bloomberg consensus was 2.0%, our forecast was 1.8%). (See Chart 1.) Most of the decline was the result of a drop in food price inflation. Pork prices fell 1.6% m/m thanks to an improvement in pork supply, while base effects from the surge in pork prices a year ago due to African Swine Fever pushed down the y/y growth rate from 52.6% to 25.5%. (See Chart 2.)
- Looking through the volatility in food prices, the broader disinflationary impact from the COVID-19 downturn continued to ease. Core consumer price inflation held steady in y/y terms at 0.5%, but in m/m terms prices rose 0.2%, the fastest pace since the COVID-19 outbreak. (See Chart 3.) A stronger base for comparison nudged down producer price inflation, from -2.0% y/y to -2.1% (Bloomberg -1.8%, CE -1.6%). (See Chart 4.) But like core CPI, factory gate prices continued to recover last month thanks to strengthening industrial demand, rising 0.1% m/m.
- With infrastructure-led stimulus still being ramped up and consumption rebounding, demand-side pressures on prices will probably strengthen in the coming months, pushing up underlying inflation. But the rebound in core consumer price inflation will still leave it relatively subdued and food price inflation looks set to drop back further in the near-term as pork supply continues to recover from last year’s African swine fever outbreak. The benign outlook for inflation means it is unlikely to be a major driver of policy decisions in the coming quarters.
Chart 1: Consumer Prices (% y/y)
Chart 2: Consumer Prices (% y/y)
Chart 3: Core CPI
Chart 4: Producer Prices
Sources: CEIC, Capital Economics