China's CPI rises by 0.5%, PPI falls by 2.1% in October

China's consumer price index (CPI), a key gauge of retail inflation, rose by 0.5 percent from a year earlier in October, contracting by 1.2 percentage points from September, mainly due to falling pork prices, the National Bureau of Statistics (NBS) said on Tuesday.

The country's producer price index (PPI), which measures goods cost at factory gate, edged down to 2.1 percent in annual terms for the ninth straight month in October, according to the NBS. The decline was same as in September.

The consumer inflation eased to its slowest since 2009, compared with a 0.8-percent rise forecasted by the Reuters poll and the Bloomberg survey. The PPI inflation missed expectations for a 2-percent decline tipped by the Reuters poll and a 1.9-percent drop in the Bloomberg survey.

"China's inflation data for October came in below market expectations," Nomura's Chief China Economist Lu Ting said in an email to CGTN. "The decline in CPI inflation does not mean China is experiencing disinflation or deflation, as the drop was mainly driven by pork prices," Lu added.

"The year-on-year growth rate of CPI has fallen back a lot, mainly due to the high comparison base in the same period last year, the reduction in carry-over factors and pork prices turning to decline from rise," said Dong Lijuan, a senior statistician with the NBS.

"Headline consumer price inflation fell sharply in October to its lowest since 2009. But this was almost entirely due to falling food prices – core inflation and factory gate inflation held steady last month," said Julian Evans-Pritchard, senior China economist at Capital Economics.

The CPI drop was mainly driven by falling pork prices, which declined 2.8 percent year on year in October, and it was the first decline after 19 months of sharp increases due to supply constraints.

According to NBS estimates of the contributions from specific headline CPI components, Lu estimated pork's weighting in the NBS CPI basket, as implied by year-on-year inflation data, rose to 4.6 percent in October from 3.9 percent in September.

"Excluding pork, CPI inflation actually bottomed out in July at 0.4 percent year on year and remained stable at 0.7 percent between August and October, despite negative PPI inflation that was driven by sharply lower global oil prices," said Lu.

Within CPI, the prices of vegetables, beef and mutton rose 16.7 percent, 7 percent and 3.6 percent, respectively, while the prices of eggs, chicken and duck declined by 18.3 percent, 13.2 percent and 6.5 percent, respectively, according to NBS.

Of the non-food categories, transportation and communication price inflation dipped slightly to negative 3.9 percent year on year in October from negative 3.6 percent in September, largely due to transportation-related fuel price inflation, which dropped to negative 17.2 percent year on year in October from negative 14.7 percent in September, in contrast to the uptick in global oil price inflation, according to Nomura.

The core CPI, which excludes more volatile food and energy prices and may better reflect long-term inflation trends, remained unchanged from September at 0.5 percent year on year in October.

Lu said PPI inflation was slightly below market expectations, as the gradual recovery of domestic demand largely offset the fall in oil-related price inflation.

PPI inflation was mixed among upstream sectors, with inflation for the raw materials and processing sectors edging up to negative 6.0 percent and negative 1.2 percent year on year respectively in October, and inflation for the mining sector moderating to negative 5.1 percent year on year.

PPI inflation among major oil-related industries fell modestly in October, with oil and natural gas extraction down negative 30.4 percent year on year in October, and fuel processing down to negative 18.5 percent.

Furthermore, PPI inflation for the ferrous metal processing industry ticked up slightly to 0.3 percent year on year in October, while PPI inflation for the non-ferrous metal processing industry remained unchanged from September at 2.9 percent year on year in October.

"China's economy has been recovering and, in sequential terms, has also experienced a moderate reflation," Lu noted.

China's economic recovery gathered pace in the third quarter of 2020, with GDP growth in July-September hitting 4.9 percent in annual terms, boosted by investment and exports. The growth beat the second quarter's 3.2 percent, which reversed the first contraction of 6.8 percent in the first quarter.

China continues to be the only economy in the world to have positive growth in 2020 as its GDP is predicted to expand 1.9 percent this year, according to the latest economic outlook released by the International Monetary Fund (IMF) in October.

"We expect headline CPI inflation to drop further towards zero in the next several months on a still-unfavorable base effect driven by a massive rise in pork prices from end-2019 through the spring of 2020," Lu said.

Lu does not think the central bank will react to the decline in CPI inflation data by turning more dovish but does expect Beijing to maintain its "wait and see" policy approach by neither stepping up nor rolling back its existing policy easing measures.

(Cover: VCG)