China inflation fuels rate-cut calls as world starts to tighten

The producer price index rose 10.3% from a year earlier, down from November’s 12.9%, while the consumer price index increased 1.5%, compared with 2.3% in November.
Image: Qilai Shen/Bloomberg

China’s inflation pressures moderated in December, giving the central bank scope to cut interest rates to cushion the economy’s downturn just as most major nations look to tighten policy.

The producer price index rose 10.3% from a year earlier, down from November’s 12.9%, while the consumer price index increased 1.5%, compared with 2.3% in November. Both came in lower than economists expected.

China’s inflation pressures moderated in December, giving the central bank scope to cut interest rates to cushion the economy’s downturn just as most major nations look to tighten policy.

The producer price index rose 10.3% from a year earlier, down from November’s 12.9%, while the consumer price index increased 1.5%, compared with 2.3% in November. Both came in lower than economists expected.

The spread of omicron-variant virus cases in China remains a cloud over the inflation outlook. China is the world’s biggest producer and consumer of raw materials, and if outbreaks continue to spread and prompt more lockdowns, some supply-side disruptions could ensue. The upcoming Lunar New Year holidays will also see a surge in demand for staple foods and possibly higher prices.

“Lower inflation opens room for the government to loosen monetary policies further,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management Ltd. “The recent Covid outbreaks in some Chinese cities impose further downside risks to the economy. The pressure on the government is rising.”

The PBOC could trim the cost of 7-day repos — a shorter-term interest rate — as soon as Friday, according to Li Chao, an analyst at Chinese brokerage Zheshang Securities Co., and then follow with cuts to the 14-day repo and MLF rates on January 17.

China’s tech-heavy ChiNext Index rose as much as 2.4% after the inflation data was released, it’s steepest gain since November 22. The gauge had been falling every day since the new year.

For the full year, factory gate prices rose 8.1%, while consumer prices increased 0.9%. Economists expect consumer prices to grow 2.2% in 2022, and factory-gate prices to gain 4% for the full year, according to the median estimates in a Bloomberg survey.

Other key highlights of the data:

  • Core CPI rose 1.2%, the same as in November.
  • Hotel and accommodation prices fell 0.8% month-on-month as virus outbreaks curbed travel.
  • Services inflation was 1.5% in December, unchanged from the previous month.
  • Non-food prices increased 2.1%, while food prices fell 1.2%. Prices of fuels used in transportation surged 22.5% year-on-year, the biggest jump among non-food categories.
© 2022 Bloomberg

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