China's producer inflation slows again in October on ebbing domestic demand

BEIJING (Reuters) - China’s factory-gate inflation slowed for the fourth month in October on cooling domestic demand and manufacturing activity, signaling Beijing would likely roll out more growth-boosting measures in the face of trade frictions with the United States.

Newly manufactured cars are seen at the automobile terminal in the port of Dalian, Liaoning province, China July 9, 2018. REUTERS/Stringer

Consumer prices, meanwhile, increased at the same pace in October from the previous month with food prices stable, official data from National Bureau of Statistics (NBS) showed on Friday.

The producer price index (PPI), a measure of the prices businesses receive for their goods and services, rose 3.3 percent in October from a year earlier, easing from 3.6 percent in September, the statistics bureau said.

Analysts polled by Reuters had expected the October producer price inflation rate - also used by economists as a rough gauge of industrial profit trends - would ease to 3.3 percent. On a month-to-month basis, the PPI increased 0.4 percent.

“Rising import prices are likely to put some upward pressure on producer prices, but not enough to prevent PPI inflation from falling,” said Chang Liu, China economist at Capital Economics.

“Indeed, we think policymakers will pay more attention to evidence that underlying price pressures remain subdued and will continue to ease policy over the coming months to shore up economic activity.”

Economic momentum in China has been softening in the past months, and last week President Xi Jinping acknowledged that the world’s second-largest economy is facing “growing downward pressure.”

Underlying factory-gate inflation in recent months has been crimped by easing consumption, with China’s fixed-asset investment growth hovering around record lows and industrial profit growth slowing for the fifth consecutive month in October.

Beijing’s clamp-down on financial risks has also slowed credit demand somewhat, while many mid-sized companies have struggled to pass on higher prices to consumers.

Private and official factory surveys have shown a worrying months-long downturn on export orders, suggesting Beijing’s intensifying trade dispute with the United States is starting to put a strain on businesses.

Government data on exports, however, highlighted remarkable strength, likely due to shippers rushing to beat higher U.S. tariffs on Chinese goods due to come into effect at the start of next year.

The rising headwinds to growth have prompted Beijing to ramp up stimulus measures - including cuts to cash banks must hold as reserves and higher fiscal spending - to spur domestic demand.

Raw material prices increased 6.7 percent in October from a year earlier, down from a 7.3 percent gain in September. Inflation in the fuel processing sector and chemicals manufacturing industry slowed in October from the previous month.


Analysts believe inflation on both consumer and producer measures is set to cool through to the end of the year as China’s economy slows and commodity prices fall, though the yuan’s continued depreciation will put some upward pressure on import prices.

“If the renminbi weakens further over the months ahead as we expect, the cost of Chinese imports would continue to rise. That said, the impact of this on domestic prices wouldn’t be large,” Capital Economics’ Liu said.

The consumer price index (CPI) rose 2.5 percent in October from a year earlier, same as September’s rate and analysts’ forecast.

On a monthly basis, the CPI rose 0.2 percent, moderated from 0.7 percent gain in the preceding month.

The NBS attributed the monthly CPI slowdown to a fall in food prices, which dropped 0.3 percent from September despite supply disruptions caused by flooding and the outbreak of African swine flu.

The core consumer price index, which strips out volatile food and energy prices, rose 1.8 percent year-on-year in October, compared with 1.7 percent a month earlier.

China has set its consumer inflation goal at 3 percent for 2018, same as last year. The state planner recently said consumer prices are expected to remain within a reasonable range.

“We expect inflation to be trending down in the coming months as economic activities continue to slow,” Raymond Yeung, Greater China Chief Economist at ANZ said.

Reporting by Zhang Min, Lusha Zhang and Ryan Woo; Editing by Shri Navaratnam