For the first time since 2009, China witnessed consumer price deflation.
CPI declined 0.5% in November, data out Wednesday showed. Consensus was looking for no change. The range of estimates from 29 economists was -0.3% to +0.8%, so the actual print marks a big downside surprise.
And yet, “surprise” is a bit of a misnomer here. This was expected, considering the steady decline in pork prices, which famously spiraled higher late last year.
China succumbed to factory-gate deflation in the summer of 2019. As the figure (above) shows, PPI has struggled to get back into positive territory since. That was a headwind for industrial profits, and the pandemic clearly didn’t help. But the situation is abating. November’s PPI print was -1.5%, better than the -1.8% drop economists expected, and up from October.
With the Chinese economy on the mend and expected to eke out growth in 2020, the country’s bout with consumer price deflation will probably prove fleeting.
PMIs are solid and the latest trade data showed imports rose a third month, while exports were particularly strong. Crucially, retail sales in the world’s second-largest economy grew 4.3% YoY in October. That was less than the 5% consensus was looking for, but nevertheless marked a third consecutive monthly rise, an ostensibly positive sign for domestic demand.
The biggest near-term implications of the negative CPI print are probably for the PBoC, which you’d think would be more hesitant to normalize policy in the face of falling consumer prices.
That could be a boon to markets, and especially to Chinese bonds, which are particularly sensitive to PBoC expectations.
Of course, that doesn’t mean the central bank is going to pivot back into easing mode either, especially not when you consider the outsized influence of a single input on the whole equation. Pork prices dropped 12.5% last month. Core inflation was unchanged at 0.5%.
