China factory deflation deepens in April as recovery stalls

BEIJING (BLOOMBERG) – China’s factory deflation deepened in April and consumer price gains slowed, signaling ongoing weakness in the world’s second-largest economy.

The producer price index dropped 3.1 per cent in the month, versus a forecast 2.5 per cent decline. The consumer price index rose 3.3 per cent in April from a year earlier, the National Bureau of Statistics said Tuesday. That compares to the median estimate of a 3.7 per cent increase and a 4.3 per cent rise in March.

Pork prices, a key element in the country’s CPI basket and a source of inflation due to a previous swine fever outbreak, rose 96.9 per cent on year, moderating from March’s 116.4 per cent gain.

Core inflation, which removes the more volatile food and energy prices, slowed to 1.1 per cent from a year earlier after 1.2 per cent in March. Muted core inflation is the latest indication that domestic demand remains sluggish and will likely provide more impetus for Beijing to step up growth-boosting measures.

China’s economy has staged a steady but weak recovery, as virus control measures are being lifted. The government has so far kept stimulus policies at a subdued level. Some economists, including Nomura’s Lu Ting, are forecasting that a large, financial relief-centered stimulus package is around the corner

Factory deflation, however, is of a bigger concern for policy makers. Falling factory product prices, weighed on by the oil price decline, made it hard for companies to generate profits and expand businesses. Weaker external demand also bodes ill for exporters’ outlook.

“Corporate profits would be under pressure under deflation, just like what happened in 2015,” Larry Hu, Chief China Economist at Macquarie Group Ltd., wrote in a note before the data release. “The good news is that CPI inflation is moderating as well, leaving more room for lower rates.”

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