PPI Deflation Arrives In China, Putting PBoC In Policy Bind

PPI deflation has arrived in China.

Producer prices contracted 0.3% YoY in July, three times the 0.1% decline forecast by economists. The range was -1.1% to +1.7%.

This is the first time factory prices have contracted since 2016, and anyone inclined to fret about the prevailing macro backdrop will doubtlessly say this underscores the urgency of resolving the trade conflict.

Durables, manufacturing and raw materials all contracted, and the prospects for a bounce in August have obviously dimmed thanks to rekindled tension between the Trump administration and Beijing.

“We think PPI inflation is unlikely to rebound to positive territory in the near term, due to weak investment demand and lower global commodity prices”, BofA said Friday.

On Thursday evening in the US, reports suggested the White House may delay license approvals for US tech companies to resume selling product to Huawei in retaliation for China breaking its supposed promise to purchase US farm goods. That sounds like yet another escalation.

Meanwhile, consumer prices in China rose 2.8% YoY last month, slightly quicker than the 2.7% pace consensus was looking for and right at the top of the range. Food prices contributed heavily.

This isn’t what one might call a “benign” combination. On the one hand, you’ve got factory deflation, which could well serve as a drag on growth and profits. But on the other hand, you’ve got rising consumer prices and a falling currency, which gives the PBoC less scope to cut rates and/or deploy other easing measures.

Ultimately, it could present a monetary policy dilemma at a time when Beijing hardly needs another headache.

For their part, BofA “only expects modest upward pressures on CPI inflation in the coming months” and says they don’t generally “think inflation will be a major constraint for monetary policy easing”.

Whatever the case, the rest of the world could do without wholesale deflation in China at a time when the outlook for global growth and trade seems to get darker by the day (and by the tweet).


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