China’s inflation slowdown fuels calls for more policy stimulus

BEIJING – China’s consumer and producer inflation slowed in August as sporadic Covid-19 lockdowns suppressed spending and commodity prices fell, giving policymakers enough room to support the troubled economy if needed.

The consumer price index (CPI) rose 2.5 per cent from a year earlier, the National Bureau of Statistics said on Friday, down from the 2.7 per cent gain in July, and weaker than the 2.8 per cent median forecast in a Bloomberg survey of economists.

Factory-gate inflation slowed to 2.3 per cent from 4.2 per cent in July as commodity prices fell. The median estimate was for a 3.2 per cent gain in the producer price index.

Consumer prices in China have remained mild this year compared with the soaring costs in the United States and Europe, where central banks have been raising interest rates in an attempt to tame inflation. The People’s Bank of China (PBOC) has taken a divergent path, cutting interest rates last month to spur an economy hit by Covid-19 outbreaks and an ongoing property market slump.

Friday’s data “reflects soft domestic demand and suggests that further easing is needed to stabilise growth”, said chief China economist Liu Peiqian at NatWest Group. A slower-than-expected pickup in food prices “gives policymakers more room for easing in coming months”, she said.

While the benign inflation picture gives policymakers room to ease monetary policy again to bolster growth, a weaker renminbi is complicating that picture. The currency is close to breaching 7 to the US dollar, with the PBOC taking concerted efforts recently to curb its slide. 

Most economists do not expect the PBOC to cut a key interest rate next week, arguing that officials will want to wait to see the effect of August’s surprise rate cut before acting again. Other policy options, including a cut to the reserve requirement ratio for banks and expanding the use of structural tools, remain on the table. 

The slowdown in consumer inflation underscored the impact Covid-19 outbreaks are having on domestic spending. Core CPI, which excludes the volatile food and energy costs, remained unchanged at a subdued 0.8 per cent in August.

Food inflation was largely driven by a pickup in pork prices, which climbed 22.4 per cent in August from a year ago, after surging 20.2 per cent in July. The government has been trying to keep inflation in check by releasing frozen pork from its massive state reserves, with the National Development and Reform Commission saying on Thursday it would release some supplies as major celebrations such as the Mid-Autumn Festival and the National Day holiday draw closer.

A moderate amount of inflation is unlikely to inhibit the central bank from rolling out additional stimulus measures this year as needed to support growth. Earlier this month, PBOC spokesman Ruan Jianhong said the “mild” rise in consumer prices provided “good conditions for monetary policy adjustment”.

Premier Li Keqiang said in July that as long as the increase in annual CPI stays under 3.5 per cent, the country can “live with” an economic growth rate that is slightly higher or lower than the government’s target of around 5.5 per cent. Economists expect gross domestic product growth to hit just 3.5 per cent this year. BLOOMBERG