China's latest inflation report points to an economy that's losing momentum

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  • Chinese inflationary pressures decelerated sharply in December.
  • Consumer prices grew at the slowest annual rate since June. Producer prices were even softer, increasing by the least since September 2016.
  • The decline adds to evidence of a slowdown in the world’s second-largest economy. It may also have ramifications for global inflationary pressures.

Chinese inflationary pressures eased sharply in December, adding to a lengthening list of indicators that point to a sharp loss of momentum in the world’s second-largest economy.

According to China’s National Bureau of Statistics (NBS), consumer prices rose by 1.9% over the year, the smallest increase since June.

Markets had been expecting an increase of 2.1% after prices rose by 2.2% in the year to November.

Food prices grew by 2.5% over the year, faster than the 1.7% increase in non-food items over the same period.

Making the deceleration in consumer prices look small in comparison, producer prices, also known as factory-gate inflation, increased by just 0.9% over the year, the weakest increase since September 2016.

Previously, producer prices grew by 2.7% in the year to November. Markets had been expecting a smaller deceleration to 1.6% in December.

Combined, the steep slowdown in price pressures indicates a loss of momentum in the Chinese economy late last year, especially in industrial sectors where activity levels deteriorated for the first time in over two years in December, according to the separate manufacturing PMI released by the NBS.

“Sliding producer prices and falling growth momentum tend to move in tandem,” said Raymond Yeung and Betty Wang, members of ANZ Bank’s China economics team.

Chinese policymakers have already responded to the slowdown in economic activity, recently announcing a cut to the reserve requirement ratio for all Chinese lenders to promote lending and keep ample liquidity in China’s financial system ahead of Lunar New Year celebrations.

Fiscal stimulus has also been introduced to encourage increased household consumption and boost infrastructure investment.

Yeung and Wang think there may be more stimulus to come if annual producer price inflation turns negative.

“If it remains negative for a few consecutive months, the government may consider policy accommodation and property relaxation measures to reduce the risk of a deflationary scenario similar to that during 2012-2016,” they said.

Nearer-term, the steep deceleration in producer prices may also have ramifications for global inflationary pressures given it has been a reasonable lead indicator for US export prices and headline inflation readings for major developed economies in the past.

Should the relationship remain in tact, it points to downside risks for global inflationary pressures in the months ahead.

China’s Q4 GDP report will be released on January 21. In the year to September, the economy grew by 6.5%, the slowest expansion since the GFC. Given recent indicators, growth looks to have slowed even further in the final three months of 2018.

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