Here’s another drag on China’s virus-hit economy: Falling prices

Producer prices in Chinese factories declined in February on coronavirus effects, but food prices soared.

Workers China
With factory gate prices in China turning deflationary, analysts expect China's central bank to announce more stimulus measures [File: Qilai Shen/Bloomberg]

China‘s factory prices resumed their decline in February, raising expectations that policymakers would embark on more stimulus measures as the coronavirus outbreak continued affecting economic activity.

But while core inflation, which excludes food and energy prices also slipped into deflation territory, consumer inflation neared eight-year heights on high food costs.

Core consumer prices rose 1 percent in February from a year ago, the slowest pace since June 2010 although overall consumer inflation rose 5.2 percent, the National Bureau of Statistics said on Tuesday.

Food prices jumped 21.9 percent, led by a 135.2 percent jump in pork prices, while non-food prices rose 0.9 percent, the data showed.

The producer price index (PPI) registered a 0.4 percent decline on year after rising 0.1 percent in January. Analysts had expected PPI to fall 0.3 percent from a year earlier.  

“I think the decline will deepen due to weaker oil prices. The shock from the COVID-19 and collapse of oil prices have overshadowed the positive restocking sentiment on the back of improving US-China trade talks,” said Tommy Xie, China economist at OCBC Bank in Singapore.

China implemented large-scale quarantine measures and limited production at factories to contain the contagious disease, which has infected more than 80,000 people and killed more than 3,000 lives in the mainland alone.

The outbreak which began late last year likely halved China’s economic growth in the first quarter compared with the previous three months, triggering expectations for more interest rate cuts, according to the latest Reuters poll.

More easing expected

The People’s Bank of China (PBOC) has ramped up policy support for the economy and eased borrowing costs for companies hardest hit by the outbreak, but analysts do not expect high consumer inflation to be a significant hurdle for future measures from policymakers.

“Declining core inflation and deepening factory-gate deflation will increase pressure on the PBOC (People’s Bank of China) to ease monetary conditions further,” Julian Evans-Pritchard, senior China economist at Capital Economics, said in a research note.

Nomura forecasts PPI could drop further to negative 1 percent in March on falling oil prices and oversupply of upstream raw materials

Analysts at Goldman Sachs said in a note before the data that elevated consumer inflation will not be a large constraint for the central bank given its priority to support the economy.

“We expect the balance towards growth stability to continue in the near term. But elevated inflation may limit the room for interest rates to decline rapidly,” they said.

Source: Reuters