China’s consumer prices soar, but producers see continued slump

China‘s consumer prices rose at their fastest pace in almost eight years in November as food costs surged but producer prices declined for the fifth straight month, complicating policymakers’ efforts to boost demand as economic growth slows.

Beijing is under pressure to unleash more stimulus to boost industrial activity, but high inflation ahead of the Lunar New Year may be a headache for policymakers trying to shore up growth that has slipped to the lowest in nearly 30 years.

The country’s consumer price index rose 4.5 percent from a year earlier, the fastest pace since January 2012, according to data released on Tuesday. It was driven mostly by a surge in pork prices as African swine fever ravaged the country’s hog herds.

However, domestic demand stayed subdued as core inflation – which excludes food and energy prices – showed only modest pressure.

“The high CPI would surely have an impact on China’s monetary policy, but overall we don’t see risks of inflation spike across the board, so current monetary policy with a loosening bias will not be significantly affected,” said Liu Xuezhi, an analyst with Bank of Communications.

In contrast, China’s producer prices fell in annual terms for the fifth consecutive month in November.

The producer price index (PPI), seen as a key indicator of corporate profitability, declined 1.4 percent from the previous year, compared with a 1.5 percent drop forecast in a Reuters poll and 1.6 percent fall in October.

Sluggish manufacturing activity dragged down by trade pressures and weakening demand at home has put pressure on Beijing to roll out more stimulus to bolster its economy.

A milder fall in factory-gate prices in November than in previous months may have been helped by tentative signs of improvement in manufacturing activity, although economists have noted the recovery could be difficult to sustain.

Weak prices were mainly seen in oil and gas extraction and chemical fibre manufacturing sectors.

Beijing has rolled out a series of measures to support growth, including reductions in market interest rates and front-loading 1 trillion yuan ($142.1bn) worth of local government special bonds issuances from the 2020 quota to this year. But the government has insisted it will not resort to “flood-like” stimulus.

China and the United States are negotiating a first phase trade deal aimed at de-escalating their trade dispute but they continue to wrangle over key details. But even if a deal is struck, economic growth is expected to continue slowing in the current and coming quarters.

Government advisers said China should lower its growth target to about 6 percent in 2020 as the trade dispute remains unresolved.

A porky problem

Wholesale pork prices have seen a slight reprieve in November but remain elevated compared with a year earlier. Pork prices more than doubled year-on-year in November, according to the statistics bureau.

Analysts expect pork will remain in high demand as China prepares to celebrate the Lunar New Year, the peak consumption period for the meat. Last week, the government’s finance ministry announced waivers for some purchases of US pork and soybeans.

Climbing consumer prices are adding to the headaches of policymakers, who are racing to meet Beijing’s annual growth target as the world’s second-largest economy slows to the lower end of a 6-6.5 percent range for 2019.

For the full year of 2019, China is aiming for a CPI target of about 3 percent. It rose 2.8 percent in the January-November period.

Goldman Sachs said in a recent note that China’s CPI target for 2020 is likely to be raised from the default 3 percent level.

This is because CPI inflation is likely to be in the 4-5 percent range at the start of the year already, underscoring continued price pressures.