China Factory Inflation Eases as Consumer Prices Remain Subdued

China’s factory inflation moderated as consumer price gains remained tepid, further reducing a potential source of pressure for policy makers to boost borrowing costs.

Key Points
The producer price index rose 5.8 percent in November from a year earlier, matching the projection in a Bloomberg survey and slowing from 6.9 percent in October
The consumer price index climbed 1.7 percent, the National Bureau of Statistics said on Saturday, less than the median forecast of 1.8 percent

Big Picture
While this year’s surge in raw-materials prices will feed through to consumer products next year, headline factory price growth is seen slowing amid higher year-ago base comparisons and moderating investment demand. As top leaders step up pledges to ensure financial stability amid soaring debt, economists say moderate inflation and an outlook for tame price gains gives the authorities less cause to pursue a broad tightening of borrowing costs.

Economist Takeaways
“Slowing inflation helps ease concerns on tighter monetary policy,” said Tommy Xie, an economist at Oversea-Chinese Banking Corp. in Singapore. “The CPI drop was mostly driven by the decline in food prices, while PPI fell because the base last year was too high. I expect consumer inflation to remain largely stable and fluctuate around 2 percent in the coming year, while the growth of PPI will very likely fall below 5 percent in December.”

“Easing of inflation is probably something policy makers are willing to see, as this suggests China isn’t under pressure to boost interest rates,” said Xia Le, chief Asia economist at Banco Bilbao Vizcaya Argentaria SA in Hong Kong. “As now stricter financial regulation dominates the market sentiment, the authorities may not hope to also increase borrowing costs with tighter monetary policies.”

“We should expect, given the impact of the base effect, that PPI will continue to fall,” said Christopher Balding, an associate professor at the HSBC School of Business at Peking University in Shenzhen. “This is actually somewhat positive, depending on how you look at it, for monetary policy. It eases some of the pressure to increase rates though rates will likely increase regardless of PPI.”

PPI will decelerate further while CPI inflation faces upward pressure next year, Liu Liu, an economist at China International Capital Corp. in Beijing, wrote in a report. “As winter comes and Spring Festival becomes closer, vegetable prices will rebound,” Liu wrote.

Bloomberg Economics
“Cooling commodities prices could push PPI inflation lower,” Fielding Chen, an economist at Bloomberg Economics in Hong Kong, wrote in a note. He said the inflation data “reinforce Bloomberg Economics’ view that the central bank is likely to deploy macro-prudential and regulatory instruments rather than tighter monetary policy to encourage deleveraging.”

The Details
Food prices fell 1.1 percent from a year earlier, while non-food prices rose 2.5 percent, the NBS said in a statement
A core consumer inflation gauge that strips out food and energy was steady, matching a six-year high of 2.3 percent
Raw materials producer prices rose 9.7 percent, the second-slowest pace this year
Source: Bloomberg