China Double-Ds: Consumer Prices Suffer Worst Deflation Since GFC, Producer Price (Downside) Pressures Persist

Overnight saw a Double-Deflation Day in China as both Consumer and Producer Prices continued to deflate (on a YoY basis), with the headline CPI deflation worsening and PPI deflation easing a little.

The consumer price index dropped 0.8% YoY in January – the weakest since September 2009 (and worse than economists’ expectations for a 0.5% decline).

The producer price index fell 2.5%, marking 16 straight months of deflation for factory-gate costs.

Source: Bloomberg

Core CPI, which strips out volatile food and energy costs, rose 0.4%, slower than December and the weakest rise since June last year.

Pork prices dropped 17%, helping drag down food prices by 5.9%, which was the biggest decline on record in data back to 1994.

Food: -5.9% YoY in January (-18.1% mom annualized*) vs. -3.7% YoY in December.

Non-food: +0.4% YoY in January (-1.5% mom annualized*) vs. +0.5% YoY in December.

Year-over-year PPI inflation edged up to -2.5% YoY in January from -2.7% YoY in December, largely on a low base.

In month-over-month terms, PPI inflation fell to -0.7% (annualized, seasonally adjusted) in January (vs. +1.6% in December).

PPI inflation in producer goods rose slightly to -3.0% YoY in January from -3.3% YoY in December, and

PPI inflation in consumer goods edged up to -1.1% YoY in January (vs. -1.2% YoY in December)

The continued deflation was partially due to seasonally weak demand in January vs. year-ago level due to later Lunar New Year holiday this year (10-17 February 2024 vs. 21-27 January 2023).

Of course, the deflation prompted more calls for action for Beijing:

“The CPI data today shows China faces persistent deflationary pressure,” said Zhiwei Zhang, president and chief economist at Pinpoint Asset Management Ltd.

“China needs to take actions quickly and aggressively to avoid the risk of deflationary expectation to be entrenched among consumers.”

“The report drives home a message – the economy needs aggressive policy steps to boost demand and shake confidence out of its torpor. The People’s Bank of China has signaled that fighting deflation is a priority and looks set to deliver more stimulus,” said Bloomberg economist Eric Zhu

“The question is, how forceful it will be – and whether banks pass on the easing in the form of more and cheaper credit.”

But, as Goldman warned, the disinflationary pressure from ongoing property downturn points to a delayed reflation path for China, and as RaboBank noted yesterday, PBOC easing policy further (or even fiscal stimulus), probably can’t happen until the Fed starts to ease.