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China’s producer prices slid in August as concerns grow that deflationary forces are taking root in the world’s second-largest economy.
Industrial producer prices fell 1.8 per cent year on year, the most in four months, dragged down by steel, agriculture and other sectors. This compares with a decline of 0.8 per cent in July and analysts’ expectations of a 1.4 per cent fall.
China’s consumer price index, meanwhile, rose 0.6 per cent year on year, slightly below analysts’ expectations of 0.7 per cent in a Reuters poll but faster than July’s 0.5 per cent increase, the National Bureau of Statistics said on Monday.
The latest readings suggest many of China’s manufacturers, food processors and other industries are suffering the consequences of lacklustre demand across the economy.
Fred Neumann, chief Asia economist at HSBC, said that while CPI was often affected by fluctuations in food costs, producer prices were an indication of underlying trends.
“There is still a need for more demand-side policy measures to raise price pressures to absorb excess capacity in the economy,” he said.
Underlying deflation is a leading concern for many observers of China’s economy, with the former central bank governor Yi Gang warning last week that China needed “proactive fiscal policy” and “accommodative” monetary measures to support demand.
China’s GDP deflator, the broadest measure of price changes in an economy, has been negative for the past few quarters, he said. A negative GDP deflator indicates deflationary forces in the economy.
Economists are concerned that if deflation becomes too entrenched, companies will reduce investment and cut costs, wages and hiring as falling prices erode their profits. This will in turn hit salary earners, which will reduce consumption.
China’s deep property downturn, now in its third year, has depressed domestic demand while intense competition in manufacturing is pushing down prices.
The August fall in producer prices was the biggest since April, when they dropped 2.5 per cent year on year.
Dong Lijuan, chief statistician of the urban department at the National Bureau of Statistics, highlighted declines in prices of products generated by steel-related industries, agriculture, food processing and energy as among the causes of the drop in producer prices.
The August rise in CPI was the biggest since February, when prices jumped 0.7 per cent. But pork prices again played a role in the increase, helping to drive up food prices by 2.8 per cent year on year compared with only 0.2 per cent for non-food prices.
Goldman Sachs said the jump in food price inflation reflected the impact of poor weather on the supply of fruit and vegetables in August. “Both non-food price inflation and core inflation edged down in August, indicating continued weakness of domestic demand,” it said.
Producer prices have been hit by falling commodities prices and weak demand, it added. Producer price deflation would lessen gradually and CPI inflation would remain relatively low in the coming months, Goldman said.
Moody’s said in an analysis ahead of the figures that households were “keeping their spending tight in the face of falling property prices and a shaky job market”.
It said recent gains in pork prices had helped to prevent a return to outright deflation, but “make no mistake, underlying inflation pressures are negligible”. On industrial prices, it said: “Slower growth in industrial output has coincided with discounting to lure customers.”
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