Chinese Producer Prices contracted once again – UOB

Ho Woei Chen, Economist at UOB Group, assessed the recently published CPI figures and Producer Prices in China.

Key Quotes

“China’s Consumer Price Index (CPI) was steady at 2.8% y/y in August (exp: 2.7%; July: 2.8%). Food price inflation continued to march higher to 10.0% y/y in August from 9.1% in July, led by a surge in pork prices by 46.7% y/y (July: +27.0% y/y) which was the largest y/y gain since July 2011”.

“With the weight of pork in China’s CPI basket of around 2.34%, we estimate that the surge in pork prices had contributed around 1.1% point of the August headline inflation. Outside of food, there was little sign of inflationary pressure”.

“The Producer Price Index (PPI) recorded the second straight month of decline in August at -0.8% y/y compared to -0.3% in July. With expected slowdown in the manufacturing sector and lower commodity prices, PPI is likely to face further downward pressure into the year ahead. The last episode when PPI had declined was in the period between March 2012 and August 2016”.

“With GDP growth likely to fall below 6.0% in 2020, the recent decline in the PPI and the lack of strong demand-side pressure on CPI would likely keep the PBoC on an easing bias in the year ahead… Further out, we believe there is room for one more RRR cut in 4Q19 while the PBoC will also be looking at directly lowering of borrowing costs through an easing in the Medium-term Lending Facility (MLF) rate”.