China Inflation Weakens to 2-Year Low on Uneven Recovery

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(Bloomberg) — China’s consumer inflation slowed to the weakest pace in two years in April while producer prices fell deeper into deflation, reflecting muted domestic demand and softer commodity costs.

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The consumer price index rose 0.1% last month from a year earlier, the National Bureau of Statistics said Thursday, compared with a 0.7% increase in March. The median estimate in a Bloomberg survey of economists was for a 0.3% uptick. That was the weakest since February 2021, when consumer prices fell into deflation.

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Core CPI, which excludes volatile food and energy costs, increased 0.7%, unchanged from the previous month.

Producer prices fell 3.6% in April after declining 2.5% in the previous month. That was more than economists’ expectations for a 3.3% drop.

“There is still a big gap between demand and its pre-pandemic trend,” said Xing Zhaopeng, senior China strategist at Australia & New Zealand Banking Group Ltd, which he estimated may take three-to-five years to mitigate. “We do not think domestic demand can improve significantly in the near-term.”

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China’s benchmark CSI 300 Index of stocks gained as much as 0.5% in early morning trading following the data, while Asian shares broadly rose. The increase followed drops in the previous two days. The yield on 10-year government bonds fell 2 basis points to 2.69%, set for the lowest level since November.

The April figures were affected by the high base of comparison from last year, NBS analyst Dong Lijuan said in a statement. Consumer prices had increased rapidly then as Covid lockdowns of major cities — including Shanghai — battered supply chains and pushed people to stockpile food. 

Lower food and energy costs pushed inflation lower. Food prices rose 0.4% in April from a year earlier, compared to a 2.4% increase in March, with pressures on pork prices waning.

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Producer-price deflation is also being driven by falling costs for commodities like iron ore and crude oil.

What Bloomberg Economics Says …

“An undershoot in China’s April CPI inflation — almost to the vanishing point — combined with deeper deflation in factory-gate prices provides more evidence that the economy isn’t firing on all engines yet. The weak data leave a window open for the People’s Bank of China to ease policy further in coming months — before a broader rebound in demand stokes prices in the second half of the year.”

— Eric Zhu, economist

Read the full report here.

The inflation data may help to inform the central bank’s next steps amid signs of a waning economic recovery. While growth accelerated to a one-year high in the first quarter, recent data have flashed some warning signs: manufacturing activity unexpectedly contracted in April, imports plunged and export growth weakened. 

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Policymakers have signaled they want to maintain a pro-growth stance in the face of subdued domestic demand, high youth unemployment and weak property investment. The People’s Bank of China may have scope to ease monetary policy further if necessary, since more banks have cut deposit rates recently and US Federal Reserve has signaled a potential pause in rate hikes.

Given energy price drops and stable core inflation, Xing said it was “unlikely” that monetary policy in China would respond to the data. He said he sees the central bank holding rates this year.

—With assistance from Jing Zhao.

(Updates throughout with additional detail, commentary.)