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

China Consumer & Producer Prices (Jan.)

China Data Response
Written by Sheana Yue

Headline consumer price inflation returned to negative territory last month, but this was largely due to a shift in the timing of the Lunar New Year. In fact, producer price inflation turned positive for the first time since the COVID-19 outbreak as economic activity continued to improve. We think price pressures are likely to pick up further in the coming quarters.

Slip into deflation no cause for concern

  • Headline consumer price inflation returned to negative territory last month, but this was largely due to a shift in the timing of the Lunar New Year. In fact, producer price inflation turned positive for the first time since the COVID-19 outbreak as economic activity continued to improve. We think price pressures are likely to pick up further in the coming quarters.
  • Consumer price inflation fell from +0.2% y/y in December to -0.3% last month (the Bloomberg consensus was -0.1%, our forecast was 0.0%). (See Chart 1.) Most of the decline was the result of a fall in non-food inflation. This is in part a seasonal effect given the earlier timing of the Lunar New Year holiday last year compared to this year. Core consumer price inflation fell from +0.4% y/y to -0.3%, the lowest in eleven years. In m/m terms, prices edged up by +0.1%, in line with the historical average. (See Chart 2.)
  • This more than offset the seasonal rise in food prices ahead of the Lunar New Year festival which nudged food inflation up from 1.2% y/y to 1.6%. Pork prices rose 5.6% m/m but remain lower than a year ago when pork supply was tighter due to African Swine Fever. The y/y contraction in pork prices deepened from -1.3% to -3.9% last month. (See Chart 3.)
  • Encouragingly, there are signs that demand side pressures continued to strengthen last month. Producer price inflation returned to positive territory for the first time since January 2020, jumping from -0.4% y/y to +0.3% (Bloomberg and CE +0.3%). (See Chart 4.) In m/m terms, factory gate prices rose +1.0%.
  • Consumer price inflation is likely to spike in February as the New Year effect reverses. Further ahead, favourable pork price base effects will nudge up food inflation. What’s more, energy inflation will also rebound thanks to base effects from sharp declines in oil prices last year. All told, we expect consumer price inflation to rise to around 2% by the end of Q2. That shouldn’t alarm the PBOC but will provide reassurance that they are right to focus on controlling credit risks. As such, we think the PBOC will tighten policy this year.

Chart 1: Consumer Prices (% y/y)

Chart 2: Core CPI

Chart 3: Consumer Prices (% y/y)

Chart 4: Producer Prices

Sources: CEIC, Capital Economics


Sheana Yue, Assistant Economist, sheana.yue@capitaleconomics.com
Mark Williams, Chief Asia Economist, mark.williams@capitaleconomics.com