China’s annual consumer price inflation rate is expected to have slowed to less than 1 per cent in October for the first time in more than three-and-a-half years, thanks to the continued moderation in pork prices combined with protracted weak consumer demand in the wake of the coronavirus pandemic.
Amid a continued drop in price pressures in the current economic recovery, some economists have warned of rising risks of deflation – a sustained drop in consumer prices – unless Beijing maintains a sufficiently loose monetary policy to boost demand.
The National Bureau of Statistics (NBS) in Beijing is due to release the official October consumer price index (CPI) figure on Tuesday. According to the median forecast of economists polled by Bloomberg, the inflation rate is expected to fall by 0.8 per cent compared with a year ago, and down from the 1.7 per cent rate seen in September.
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The anticipated figure would not only mark the third consecutive monthly slowdown, it would also be the lowest inflation rate since February 2017 and fall under the psychologically important threshold of 1 per cent for the first time since March 2017.
“[The drop will be] led by falling pork price pressures, due to both a high base [of pork prices] in October 2019 and the continued moderation in pork prices this October,” Nomura economists wrote in a note published on October 29.
Pork prices are expected to have dropped by 1.15 percentage points in October, compared with September, with annual price changes for beef, lamb, poultry, vegetables and eggs all having a negative, albeit limited, impact on headline consumer inflation.
The skyrocketing price of pork – a central part of the Chinese diet – put upward pressure on inflation due to the lingering impact of African swine fever (ASF), which was first detected in China in August 2018. The disease wiped out about half of the country’s pig population, creating a record shortage of pork in the world’s largest pork-consuming nation.
But as of the end of October, the country’s average pork price had fallen for nine straight weeks, and has been below the level of a year earlier since the third week of October, according to data from the Ministry of Agriculture and Rural Affairs.
In the fourth week of October, the national average pork price dropped to 47.66 yuan (US$7.23) per kilogram, down 18.6 per cent from a year earlier, while the average price of live hogs declined by 23 per cent to 29.82 yuan per kilogram, as a result of significant progress made in rebuilding the nation’s pig production, the government data showed.
Wei Baigang, the ministry’s chief economist, said China had a stock of 370 million live pigs at the end of September, rebounding to 84 per cent of the pre-ASF level in 2017. The stock of breeding sows rose to 38.22 million, or 86 per cent of the 2017 level.
“Due to the increase in supply, [pork] prices will be generally lower than the same period last year, and there is unlikely to be a significant rise in prices [soon],” Wei said at a press conference on October 27.
The moderation in pork prices could continue to drag down the annual consumer inflation into next year, pushing down the average 2021 CPI rate to 1.1 per cent from a forecast of 2.7 per cent for this year, economists at Goldman Sachs said in a note on Monday.
They also stressed that the significant slowdown in core inflation – which excludes food and energy prices – as well as service sector inflation “primarily reflected weak consumption demand, hit by the pandemic”.
That sentiment was echoed by Liang Zhonghua, chief macro analyst at the Research Institute of Zhongtai Securities, who said that severe shock caused by the coronavirus on household income had resulted in lingering weak consumer demand and a free fall in core CPI inflation, which dropped to a record low of 0.5 per cent in September.
Economists from Morgan Stanley forecast that core CPI could have edged up 0.1 percentage point to 0.6 per cent in October, supported by a boost in travel and leisure demand during the national holiday period in the first eight days of the month.
The [coronavirus] impact on Chinese residents’ incomes will be protracted and result in a continued suppression on consumer demand
Liang Zhonghua, Zhongtai Securities
In contrast, the core CPI in the United States rose to 1.7 per cent in September and maintained that level in October. Liang said this reflected the different economic stimulus policies by Beijing and Washington.
“The US directly distributes money to residents hit [by the pandemic], while China stabilises jobs through increasing investment by the government and state-owned enterprises,” he wrote in a note on Monday.
“The impact on Chinese residents’ incomes will be protracted and result in a continued suppression on consumer demand,” he said. “Even if we defeated the virus in the medical sphere, the rise in core CPI may only be mild.”
China’s per capita disposable income rose 3.9 per cent from a year ago in the first three quarters of the year in non-inflation adjusted terms – much lower than the pre-pandemic level of 9 per cent, according to data from the NBS.
Along with the sharp slowdown in CPI inflation, worries over deflation have also emerged in the world’s second-largest economy.
When core inflation began to lose steam more than two months ago, Zhao Bin and Zhu He, researchers at the China Finance 40 Forum (CF40) think tank, began warning that the country should pay more attention to the risk of deflation in its ongoing economic recovery.
“At present, the main problem facing China’s economy at the aggregate level is insufficient demand,” they wrote in a note on August 30. “Maintaining a relatively loose monetary policy to achieve the goal of moderate inflation is the key guarantee of a continuous recovery of the Chinese economy in the next stage.”
Deflation is seen as a risk to the economy because consumers could tend to postpone purchases in anticipation of further price declines if they wait. This, in turn, can dampen overall economic growth, which depends in large part on consumer spending.
China’s producer price index (PPI), reflecting the prices that factories charge wholesalers for their products, is expected to have shrunk 1.9 per cent in October compared with a year earlier, narrowing slightly from a fall of 2.1 per cent in September.
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