China inflation risk ‘modest’ as consumer costs rise amid lockdown pressure, factory-gate prices ease

China’s consumer prices rose slightly last month amid logistic disruptions caused by strict coronavirus controls, while factory-gate inflation eased to its lowest level in a year, leaving room for policy support to stem economic risks. The consumer price index (CPI) beat expectations and rose by 2.1 per cent in April from a year earlier, up from a rise of 1.5 per cent in March, the National Bureau of Statistics (NBS) said on Wednesday. The producer price index (PPI), which reflects the prices that factories charge wholesalers for products, also beat expectations but continued to moderate last month and stood at 8 per cent in April from a year earlier. PPI was down from a rise of 8.3 per cent in March to its lowest level since rising by 6.8 per cent in April last year. Looking ahead, we expect CPI inflation to trend up and PPI inflation to trend down Larry Hu “The data is largely in line with expectations,” said Larry Hu, chief China economist at Macquarie Group. “Looking ahead, we expect CPI inflation to trend up and PPI inflation to trend down. Overall, the risk of inflation remains modest in China. Policymakers will step up policy support after the current Covid wave is brought under control.” The CPI increase was driven by China’s food prices rising by 1.9 per cent last month from a year earlier, up from a fall of 1.5 per cent in March. “In April, affected by factors such as the domestic [coronavirus] outbreaks and the continued rise in international commodity prices, CPI rose by 0.4 per cent month on month and 2.1 per cent year on year. All localities and departments have taken multiple measures to ensure supply and stabilise prices,” said NBS statistician Dong Lijuan. “Due to the rising logistic costs, as well as the rising needs for stockpiling food, potatoes, eggs and fresh fruits rose by 8.8 per cent, 7.1 per cent and 5.2 per cent.” Non-food prices rose by 2.2 per cent last month, year on year, unchanged from March, while China’s core consumer inflation rate – which excludes the volatile prices of food and energy – rose by 0.9 per cent in April compared with a year earlier, down from a rise of 1.1 per cent in March. “Panic buying and stocking among consumers likely also pushed up demand. As supply chain disruption is gradually resolved, inflationary pressure may fade away,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management. “As China’s economy slows, domestic demand will likely weaken in coming months. Inflation is not a concern for the policymakers. The main challenge remains the balance between containing Omicron outbreaks and stabilising economic growth.” The lockdown of China’s financial hub of Shanghai has been in place for more than one month and has caused major disruptions on logistics and factory production, especially in the surrounding Yangtze River Delta region. Beijing prioritises price stabilisation as China’s stagflation risk increases The partial lockdown and strict virus controls in other cities, including some regional manufacturing centres, have forced some residents to hoard food and also disrupted manufacturing activities. “The Covid-led disruptions to manufacturing and logistics affect both supply and demand sides of the economy,” said analysts at Nomura led by Lu Ting. “We believe the net effect could be inflationary for consumer goods, especially in the near term, as lockdowns, factory closures and travel bans lead to a shortage of food and goods and increase logistics costs in China’s urban areas. “However, if lockdown measures last for an extended period, consumption and investment demand could become depressed on falling household income, dwindling savings and rising uncertainty, which would add some disinflationary pressures.” China is battling its worst virus outbreak in more than two years, while it is also challenged by the turbulence in global commodities prices due to the war in Ukraine and capital outflow caused by aggressive US interest rate increases. This has led to increasing calls for more intensive policies to counter the adverse impact caused by the virus controls to ensure the “around 5.5 per cent” economic growth target for this year is met. “PPI is going softer because of lower metal and coal prices,” said Iris Pang, chief China economist at ING. “This is a reflection of a weaker economy. Even pork and fertiliser prices have gone up, this can’t be interpreted as inflation. “Taking into account the worry of inflation by the [People’s Bank of China], though not relevant at the moment, we expect the People’s Bank of China to cut the loan prime rate and targeted required reserve ratio in the third quarter of 2022.” With the hit to industrial output and logistics from virus disruptions starting to reverse, any lingering goods shortages may soon ease Julian Evans-Pritchard & Sheana Yue PPI inflation will continue to drop back over the coming quarters, while CPI is likely to remain well below the government’s annual target of “around 3 per cent” due to weak consumer demand, according to China economists Julian Evans-Pritchard and Sheana Yue at Capital Economics. “Although there is still a great deal of uncertainty caused by the war in Ukraine, we generally think global commodity prices will end the year lower,” they said. “And with the hit to industrial output and logistics from virus disruptions starting to reverse, any lingering goods shortages may soon ease.”