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China Jan inflation data shows deflationary pressure persists

SHANGHAI/BEIJING (Reuters) - China’s consumer inflation quickened to a five-month high in January due to rising food prices but producer prices shrank for a 47th straight month as falling commodity markets and weak demand add to deflationary pressure in the world’s second-largest economy.

A vendor arranges vegetables at her stall at a market in Nanjing, Jiangsu province, China, December 9, 2015. REUTERS/China Daily/Files

The consumer price index (CPI) rose 1.8 percent in January from a year earlier, slightly less than market expectations and up from a 1.6 percent increase in December, data from the National Bureau of Statistics (NBS) showed on Thursday.

But the slight increase was mainly due to a 4.1 percent seasonal rise in food prices before the long Lunar New Year celebrations, and did not imply any visible improvement in economic activity and broader consumer demand, analysts said.

Indeed, non-food consumer inflation remained muted, growing 1.2 percent in January on-year, up only slightly from December.

The price data also showed further signs of strain on Chinese companies, particularly in the mining and processing sectors, as sluggish demand and fierce competition force them to repeatedly cut their selling prices.

The producer price index (PPI) fell 5.3 percent in January from a year earlier, slightly less than expectations of a 5.4 percent decline and easing from 5.9 percent fall in December.

Lingering worries of deflation have reinforced economists’ views that the government and central bank will have to roll out further stimulus measures this year to spur the economy, which grew last year at its slowest pace in a quarter of a century.

“The figures highlight persistent weakness in the economy, leaving room for further monetary policy easing.” said Zhao Yang, chief China economist in Nomura.

Nomura expects four cuts to banks’ reserve requirement ratio (RRR) this year, each by 50 basis points (bps), together with two more interest rate cuts.

Zhao noted that changes in China’s consumer inflation may be less volatile in future after the NBS appeared to have lowered the weighting of food in its consumer price basket, at the same time as it changed the base year to 2015 from 2010.

The NBS said the new comparison bases affected the janaury CPI and PPI data by 0.08 and 0.002 percentage points, respectively, but exact weightings in the basket are secret.

Economists at ANZ also said more support is on the cards.

“Overall, China will likely face strong deflationary pressure in the remainder of the year,” they said in a note.

“In addition to the risk of deflation, China also continued to face capital outflows in January, as foreign reserves declined further. Therefore, we believe that further monetary policy easing is still needed.”


Chinese producers have seen their selling prices fall for nearly four straight years, reflecting sliding commodity prices, sluggish demand at home and overseas and overcapacity in key sectors including steel and energy.

Industrial profits fell for a seventh straight month in December, and were down 2.3 percent in 2015.

Many firms in the industrial sector also face very high refinancing costs in real terms, which have helped fuel bond defaults and an increase in bad loans.

Consumer prices have held up better, reflecting the relative strength of the labour market, but analysts have been watching closely to see whether weakness in the industrial sector and anaemic global trade will start to be felt more strongly in wages and income growth this year.

However, People’s Bank of China officials have indicated that they are wary of further broad-based monetary easing such as interest rate cuts, which could help boost activity but spur higher capital outflows and put more pressure on the yuan.

The PBOC has cut interest rates six times since November 2014 and RRR rates several times, but has held off on further reductions since late October, preferring to rely on short-term money market injections instead.

Other China data for January painted a mixed picture, with much weaker-than-expected exports and imports suggesting a further loss of economic momentum but far stronger new bank loans, which swelled to a record 2.5 trillion yuan ($383.6 billion), offering some hope of a pick-up in activity and prices later in the year.

($1 = 6.5168 Chinese yuan renminbi)

Editing by Kim Coghill