China’s Lingering Deflation Risks Offer Room for More Easing

  • Food price inflation slows to 2.7%, non-food prices rise 1%
  • Factory gate deflation reflects commodity price declines

China’s consumer inflation moderated and factory gate deflation extended a record stretch of declines, signaling the People’s Bank of China still has room to ease monetary policy further to support a slowing economy.

The consumer-price index increased 1.6 percent in September from a year earlier, slowing from a 2 percent rise in August and compared with a 1.8 percent median estimate in a Bloomberg survey. The producer-price index fell 5.9 percent, extending its streak of negative readings to 43 months, the National Bureau of Statistics said Wednesday.

With consumer inflation well below the government target of 3 percent all year, the central bank has further capacity to spur lending even after cutting interest rates five times since November. A property downturn has capped prices for households, while industrial overcapacity, a commodities rout and sluggish global demand have weighed on factory prices. Asian stocks retreated with industrial metals.

"It’s clear that price pressures are on the deflationary side," said Xu Gao, chief economist at Everbright Securities Co. in Beijing. "As consumer prices moderate, the PBOC will continue to expand credit."

The weak CPI was mainly due to declines in pork and vegetable prices and will gradually stabilize, Xu said.

China’s benchmark Shanghai Composite Index closed 0.9 percent lower, while the yuan weakened in offshore trade.

Food price inflation slowed to 2.7 percent from a year earlier, from 3.7 percent in August. Non food prices climbed 1 percent. Prices of consumer goods increased 1.4 percent, while services increased 2.1 percent, the data showed.

Weak demand has depressed prices around the world. Britain’s inflation rate turned negative for only the second time since 1960 last month, U.K. officials said Tuesday, and U.S. price gains haven’t exceeded the Federal Reserve’s 2 percent target for three years.

Purchasing prices for China’s factories declined 6.8 percent from a year earlier in September, reflecting cheaper commodity prices. Producer prices for mining tumbled 21.2 percent and raw materials slumped 11.4 percent from a year earlier.

The weak PPI despite recovering global commodity prices "highlights the severe overcapacity problem and sluggish domestic investment demand, " economists at Nomura Holdings Inc. led by Zhao Yang wrote in a report.

The nation will report its gross domestic product in the third quarter along with industrial production, investment and retail data on Monday. The report will show 6.8 percent expansion, according to the median of estimates in a Bloomberg survey, after two quarters in line with the government’s 7 percent target.

"Policy has already turned a corner and become more accommodative," Bloomberg Intelligence economist Tom Orlik wrote in a note. "Even so, with pressure on growth still downward, we expect further stimulus into the end of the year."

— With assistance by Xiaoqing Pi

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