China Factory-Gate Deflation Deepens on Commodity Price Fall

China’s factory-gate prices extended a record stretch of declines, with the sharpest drop in two years in December, suggesting room for further monetary easing.

The producer-price index slumped 3.3 percent from a year earlier, the National Bureau of Statistics said in Beijing today, compared with the median projection for a 3.1 percent decline in a survey of analysts by Bloomberg News. The slide has yet to be fully reflected in consumer prices, which rose 1.5 percent, matching the median estimate.

Tumbling oil and metal prices have extended the run of producer-price declines to a record 34 months, adding to deflationary pressures worldwide as China’s export prices drop. Economists anticipate the central bank will follow up a November interest-rate cut with further reductions, and with lower reserve requirements for lenders.

“The oil price drop is one factor, but the more important factor of the PPI decline is the weakness of the global economy -- look at Europe and Japan,” said Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong. “With trade and other inflation transmission methods, the whole world is facing disinflation pressure.”

Factory-gate prices of oil and gas slumped 19.7 percent from a year earlier in December, while coal tumbled 12.2 percent and ferrous metals 19 percent, according to a statement on the NBS website.

“The oil price slump is way faster than expected and domestic demand is weak,” said Zhu Haibin, chief China economist at JPMorgan Chase & Co. in Hong Kong. Zhu said an expected weak start of 2015 will prompt the government to step up measures to support the economy.

— With assistance by Xiaoqing Pi

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