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China analysts say October price drops do not portend ‘deflationary spiral’


In the latest sign of China’s unstable recovery and weak domestic demand, consumer prices fell again in October and factory-gate prices contracted further.

But while some analysts contend that China is not trapped in a cycle of deflation, they continue to call for further policy support to stem the downward risks in the overall economy.

The “main culprit” for the fall was a deepening of food-price deflation, said analysts at Capital Economics, as overall food prices dropped by 4 per cent last month, year on year, with the negative pork-price-inflation reading deepening to minus 30.1 per cent in October compared with a year earlier.

“What China has right now is a low rate of underlying inflation, which reflects the fact that domestic demand is fairly weak,” said Robert Carnell, regional head of research, for Asia-Pacific at ING.

“What the data showed is that it doesn’t take much of a negative shock from one of the components to push a low underlying headline inflation rate below zero on a year-on-year basis.”

Senior NBS statistician Dong Lijuan said the drop in CPI was due to an ample supply of agriculture products because of good weather and a drop in post-festival consumption following the “golden week” holiday at the start of October.

Non-food prices rose by 0.7 per cent, while core inflation – which receives more attention from policymakers as it excludes volatile food and energy prices – dropped for the first time in four months after rising by just 0.6 per cent last month, following 0.8 per cent growth in September.

‘Ups and downs’ ahead for China’s economy despite trade, inflation uptick

The decline in core inflation added to wider signs of renewed economic weakness, added analysts at Capital Economics, including a surprise contraction in the official manufacturing purchasing managers’ index for October.

“Nonetheless, the divergence between goods and services inflation continues to suggest that the primary disinflationary pressure is not domestic,” they added. “And with policy support still on course to drive a modest recovery in growth over the coming quarters, an extended period of deflation is unlikely.”

Meanwhile, China’s producer price index (PPI) – which reflects the prices that factories charge wholesalers for products – deepened for the first time in four months, falling by 2.6 per cent in October from a year earlier, compared with a fall of 2.5 per cent in September.

“This reflects a stronger base for comparison from a year ago as factory-gate prices were unchanged, month on month, from September. Increases in the price of energy and chemical products offset declines in metal prices,” said analysts at Capital Economics.

Carnell at ING conceded that China’s macroeconomic condition remains fairly soft and vulnerable to negative shocks, but he expects next week’s data, which includes retail sales and industrial production, to show further evidence of firming.

“If so, then this would be a further set of data that would not be consistent with the deflation story being peddled in some corners,” he added.

Capital Economics also does not expect China to “enter a deflationary spiral”, although they expect inflation to remain low for the foreseeable future.

Core inflation is likely to return above 1 per cent in the first half of 2024, they said, while the base effects weighing on food and producer price inflation are set to ease, meaning headline CPI would rise over the coming months and average around 1 per cent in 2024. They also expect factory-gate deflation to ease next year.



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