Inflation falls below market expectation

China's consumer inflation fell below market expectations in November, while the year-on-year decline in factory-gate inflation narrowed.

The Consumer Price Index, a main gauge of inflation, fell 0.5 percent last month from a year earlier, reversing the 0.5 percent rise in October, to enter negative territory for the first time since October 2009, the National Bureau of Statistics said on Wednesday.

As authorities pushed forward policies and measures to ensure stability on six fronts and security in six areas, prices of pork and other important goods for people’s livelihood continued to fall, said Dong Lijuan, a senior statistician at the bureau.

Food prices fell 2 percent year on year in November, retreating from the 2.2 percent rise in October, dragging the headline CPI down by around 0.44 percentage points to be the main reason for the pullback of CPI, Dong said.

Pork prices further plunged by 12.5 percent year on year in November compared with the 2.8 percent drop in the precious month, weighed on by a high base from surging pork prices last year and sequentially weaker pork prices in November. 

Beef and lamb price inflation both fell in November to 4.2 percent year on year and 2.2 percent, respectively, from 7 percent and 3.6 percent in October. Vegetable price inflation slumped to 8.6 percent from 16.7 percent, and egg prices extended the fall by 17.1 percent, compared with the 16.3 percent decline over the same period last year. Fruit price inflation, however, rose to 3.6 percent from 0.4 percent.

Non-food prices, meanwhile, also softened to drop 0.1 percent in November from a year earlier. In October they remained flat year on year.

Of the non-food categories, transportation and communication price inflation remained unchanged from October at a negative 3.9 percent year on year last month, “as the moderation in the transportation-related fuel price inflation largely offset the rise in the transportation-facility cost inflation,” said Lu Ting, chief China economist at financial services company Nomura.

Residence prices fell 0.6 percent year on year in November but slower than the 0.7 percent drop in October, mainly led by rent cost inflation which rose slightly, while residence-related utility cost inflation remained unchanged from October at a negative 0.9 percent in November.

Excluding food and energy components, core CPI inflation remained unchanged at 0.5 percent year on year in November, the same pace as the previous four months in a row, Dong noted.

On a month-on-month basis, the headline CPI edged down 0.6 percent in November, faster than the 0.3 percent decline in the previous month, mainly dragged by the lower food prices.

Pork price inflation remained weak to post a 6.5 percent drop month on month, albeit narrowing slightly from the 7 percent contraction in October, still well below its November 2019 print. 

Among non-food items, airfares, travel and hotel accommodation prices fell by 15.6 percent, 4.4 percent and 3.4 percent month on month, respectively, due to fewer trips during the off-season, while winter clothing prices rose by 0.4 percent as new products hit the market, according to Dong.

Discussions on China’s CPI become more interesting as people debate whether China is entering into “deflation,” whether “real yield” is rising, and whether the People’s Bank of China, the central bank, should address the “deflation” risk.

“Instead of deflation, we believe China has started a reflationary stage, real yield is not rising, markets should focus more on sequential price movement instead of the misleading year-on-year price changes, and the PBoC is unlikely to overreact to the base-effect driven negative year-on-year CPI inflation reading,” said  Lu.

Lu expects headline CPI inflation in December to rebound to zero or into slightly positive territory, “given the temporary relief from unfavorable base effects and likely sequentially higher prices for pork and energy products,” but then expects it to gradually increase to 1.5-2 percent towards the end of next year. 

The Producer Price Index, which measures the cost of goods at the factory gate, further fell 1.5 percent year on year in November but was 0.6 percentage points slower than October.

In month-on-month terms, PPI inflation rebounded 0.5 percent in November from 0 percent in the previous month, as industrial production and market demand extended recovery, Dong said.