China's Inflation Is Easing as Global Markets Fear Price Gains

Updated on
  • Both producer and consumer price indexes slowed in January
  • China had been a source of global reflation last year
Donna Kwok, UBS Senior China Economist, discusses China PPI and profits.

China’s ability to export inflation to the world appears to be waning, right at a time when investors are worried that global prices are taking off amid faster economic growth.

Factory prices, which feed through into the prices export customers pay, are continuing to soften, suggesting the world’s biggest trading nation won’t be passing on much more by way of inflation in the near term. The producer price index rose 4.3 percent in January from a year earlier, its third month of slowing, and consumer prices climbed 1.5 percent. 

It’s an about turn from a year ago when China was a key source of the reflation that buoyed markets and propelled economic growth. While China’s producer price index remains well into positive territory, its slowing pace means that if global inflation is to take off, price pressures will likely need to be fueled elsewhere.

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"China’s PPI won’t be a drag on global reflation, and it also won’t be the focus," said Tommy Xie, an economist at Oversea-Chinese Banking Corp. in Singapore. "The focus will be on wage growth in the U.S. and Europe. China’s PPI exporting inflation pressures is more a story of last year."

Stocks and bonds have slid amid emerging signs that some of the biggest economies are seeing quickening inflation that could force central banks to raise interest rates. In the U.S., jobs data for January showed a 2.9 percent year-over-year jump in average hourly earnings, the largest since mid-2009. That comes as German and Japanese labor unions demand higher wages and as higher oil and other commodity prices fuel expectations for faster inflation.

At the same time the outlook for growth remains robust. The International Monetary Fund predicts a global economic expansion of 3.9 percent this year and next, which would be the fastest since 2011.

For China, volatile food prices, rising demand for commodities and still solid exports could yet mean inflation will take off.  A base effect also played a role in damping PPI, something which will wear off over coming months.

Morgan Stanley economists including Jenny Zheng said they see "higher inflation ahead despite a temporary dip in January", according to a report Friday. "CPI softened on the Lunar New Year effect and PPI slipped on lower commodity price growth, but month-on-month growth in core CPI and non-commodity PPI remained resilient," they wrote.

Yet the continued moderation in factory prices could prove negative for domestic growth. While modest consumer price inflation helps maintain people’s spending power, slowing PPI crimps industrial profits and complicates the nation’s effort to pay down corporate debt. Mining, raw materials, and manufacturing PPI all slowed in January. Food and non-food CPI both moderated.

What Our Economists Say...

"Slower PPI inflation starting in 4Q 2017 raises questions about the longevity of the reflation that drove a revival in industrial profits last year," said Hong Kong-based Bloomberg economist Fielding Chen.

"We have probably seen the peak of inflation pressures in China already," said Hao Hong, chief strategist at Bocom International Holdings Co.. Hao reckons Chinese inflation is a strong bellwether for global prices too.

"The Chinese cycle tends to lead the global cycle by six months or so, therefore by the time we get to the middle of this year we should see U.S. inflation easing as well."

— With assistance by Enda Curran, Tian Chen, Miao Han, and Yinan Zhao

(Updates to add economist comments eighth paragraph.)
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