China’s consumer prices rebound thanks to Lunar New Year spending boom, but deflationary risks still loom
- Consumer price index (CPI) grows by 0.7 per cent year on year in February, beating forecasts and marking first rise following six months of decline
- However, factory-gate prices fall for 17th straight month in what analyst describes as ‘warning signal’ that deflation pressure remains
China’s consumer prices rebounded in February thanks to a holiday-driven consumption boom, but deflationary pressure still looms as domestic demand has yet to really recover.
The growth is higher than the 0.4 per cent gain forecast by economists in a Wind poll.
Inflation also grew 1 per cent from last month, outpacing a 0.3 per cent uptick in January, according to data from the National Bureau of Statistics (NBS) released on Saturday.
Meanwhile, China’s producer price index (PPI) – which measures the cost of goods at the factory gate – was down 2.7 per cent year on year in February, following a year-on-year drop of 2.5 per cent in January, marking 17 straight months of decline.
The PPI also dipped 0.2 per cent from last month.
The year-on-year decrease was bigger than the estimated drop of 2.5 per cent predicted by the Wind poll.
Combined data for January and February show the CPI was unchanged from the same period last year, while the PPI dropped 2.6 per cent in the first two months, compared to the same period last year.
Analysts at Nomura expect that due to weak demand, CPI inflation will be 0.4 per cent in 2024, while PPI inflation will be minus 0.8 per cent.
Last month’s jump in the CPI came after a 0.8 per cent year-on-year decrease in January, which marked the sharpest drop in inflation since September 2009. China’s inflation rate has been on a negative trajectory after a slight uptick in August and falling flat in September.
China’s core inflation, which excludes volatile food and energy prices, grew 1.2 per cent year on year in February.
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Hunter Chan, an economist at Standard Chartered, said a “moderate pick up” in the annual average core inflation was expected this year, citing “continuing demand recovery”.
Chief NBS statistician Dong Lijuan said rising demand during Lunar New Year was the reason for the uptick in the CPI in February. According to the NBS, food prices went up 3.3 per cent month on month in February.
Alicia Garcia-Herrero, chief economist for Asia-Pacific at Natixis, agreed that the main reason for last month’s CPI increase was Lunar New Year, as the holiday season tended to see greater spending and rising prices.
Garcia-Herrero said consumer inflation could be in positive territory in the coming months due to a low CPI base last year, but this would not lift deflation pressure for policymakers.
PPI gives you a warning signal that the problem is not over
“Last year, the CPI was negative for most of the year. I can imagine this year it won’t be fully negative, maybe from 0 to 1 per cent, exactly like this data point,” Garcia-Herrero said.
She added that while the CPI figure was “good news”, PPI data remained “underwhelming”.
“PPI gives you a warning signal that the problem is not over,” she said.
“[PPI] is still negative month on month, so the deflation pressure continues on the upstream sector.”
Larry Hu, chief China economist at Macquarie Group, said it was “premature to call an exit to deflation pressure” just based on February’s CPI data, which was affected by the timing of Lunar New Year this year versus last year.
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The PPI data “reflects both the high comparison base and the softening commodity prices in the recent months”, he added.
The market has viewed the extended decline in China’s consumer prices as underscoring deflationary risks caused by weak demand.
Beijing denies there has been deflation.
Pan Gongsheng, governor of the People’s Bank of China (PBOC), said last week that the central bank would focus on stabilising price levels and pushing for a mild rebound in prices for the coming year.
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Louise Loo, lead economist at Oxford Economics, noted that the year-on-year rise in oil prices was “more than offset by upstream segments still under strong disinflationary pressures” in February.
“These forces are likely to be structural and related to the oversupply of several industries, so we could see PPI trending lower for longer,” she said.
China’s manufacturing activity has also been in contraction for a fifth consecutive month.
The China Construction Machinery Association reported total sales of 24,984 excavators from January and February on Thursday. This marked a 21 per cent drop compared to the same period last year.
Domestic excavator sales declined by 24.6 per cent year on year, while exports dropped by 19.1 per cent.
