Inflation expands while pork prices soften

China's consumer inflation continued to expand in November amid softening pork prices, while factory-gate inflation declined further year on year.

The Consumer Price Index, a main gauge of inflation, jumped 4.5 percent year on year in November, 0.7 percentage points faster than October, the National Bureau of Statistics said on Tuesday.

The growth rate, which was up from 3.8 percent in October, was the highest so far this year.

The higher headline CPI figure was mainly led by skyrocketing pork prices, which surged 110.2 percent in November year on year. However, they softened in November by rising 3.8 percent, down 16.3 percentage points compared with the month before.

According to the China Animal Agriculture Association, average wholesale pork prices have dropped almost 20 percent from 56 yuan (US$7.95) per kilogram at the end of October to 46.3 yuan per kilogram at the end of November.

Shen Yun, a senior statistician at the bureau, said prices softened as government measures at national and local levels to restore hog production started to take effect and pork supply was rising.

In contrast, the price of beef, mutton, chicken and duck registered month-on-month increases in November, ranging from 1.3 percent to 4.3 percent, due to stronger consumption in a peak consumption season and the need for substitutes, Shen said.

Food prices soared 19.1 percent year on year, 1.8 percentage points lower than the previous month, leading to a 3.72-point rise in the overall CPI, according to the bureau.

Fresh vegetable prices, however, slumped by 6.8 percent on account of abundant supply, Shen said. Vegetable prices rose by 3.9 percent, as production, preservation and transport costs increased in winter. Non-food prices, meanwhile, grew 1 percent, contributing 0.77 percentage points to the headline CPI growth.

Prices in the education, culture and entertainment sector, health care and clothing rose by 1.7 percent, 2 percent and 1.1 percent, respectively, while transport and communication prices fell 2.8 percent year on year.

On a month-on-month basis, the headline CPI edged up by 0.4 percent last month, 0.5 percentage points lower than the pace in October.

The Producer Price Index, which measures the cost of goods at the factory gate, fell 1.4 percent year on year in November, compared with a 1.6 percent drop in August, which was "due mainly to higher prices for oil and other raw materials, as well as a low base in November 2018," according to Nomura.

In month-on-month terms, the PPI dropped by 0.1 percent, reversing the 0.1 percent rebound in the previous month.

Nomura expects headline CPI inflation to edge down to 4.3 percent year on year in December and will rebound to 5.5 percent in January 2020, however above 4 percent year on year in the first half of next year.

In terms of expectation for future policies, “we believe the central bank will likely prefer low-profile easing measures to inject liquidity in the near term,” Nomura reports said. 

ANZ expects the People’s Bank of China  to cut the reserve requirement ratio by 50 basis points to cater to higher liquidity demand due to increased cash withdrawals during the Spring Festival period in late January and the issuance of special local government bonds in the first quarter of 2020.