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China inflation slows to near zero as economic recovery remains uneven

BEIJING – China’s consumer inflation slowed to its weakest pace in two years in April, while producer prices fell deeper into deflation, fuelling debate about whether more policy stimulus is needed.

The consumer price index (CPI) inched up 0.1 per cent last month from a year earlier, the National Bureau of Statistics said on Thursday, reflecting muted domestic demand as well as base effects from last April’s Shanghai lockdown. Core CPI, which excludes volatile food and energy costs, was unchanged at 0.7 per cent.

Producer prices fell 3.6 per cent in April as commodity costs softened. The figure was more than March’s drop and steeper than economists had expected. 

“There is still a big gap between demand and its pre-pandemic trend,” said ANZ senior China strategist Xing Zhaopeng, adding that this may take three to five years to mitigate.

“We do not think domestic demand can improve significantly in the near term,” he said.

China’s economic growth accelerated to a one-year high in the first quarter, but recent data on contracting manufacturing activity and weakening trade have flashed warning signs that the recovery may be waning.

Bloomberg Economics analyst Eric Zhu said: “An undershoot in China’s April CPI inflation – almost to the vanishing point – combined with deeper deflation in factory-gate prices, provides more evidence that the economy is not firing on all engines yet. The weak data leaves a window open for the People’s Bank of China (PBOC) to ease policy further in the coming months – before a broader rebound in demand stokes prices in the second half of the year.”

This has created speculation about whether the central bank will ease policy – and it has some scope to do so, given that the United States Federal Reserve signalled a potential pause in interest rate hikes and the latest data showed that US inflation cooled somewhat in April.

Chinese banks may also have room to lower lending rates after some of them cut their deposit rates recently.

The PBOC will not likely take any immediate action, according to Mr Bruce Pang, chief economist for Greater China at Jones Lang LaSalle.

“China is still in the stage of disinflation, not deflation,” he said, adding that the May CPI may be lifted by spending over the Labour Day holiday period at the beginning of the month. This leaves “less urgency for large-scale monetary easing” in the short term.

“Securing income growth and improving consumer confidence remain key policy priorities for delivering a more sustainable consumption recovery,” he said.

A high base of comparison with April 2022 weighed on last month’s data, NBS analyst Dong Lijuan said in a statement. Consumer prices had increased rapidly then as Covid-19 lockdowns of major cities, including Shanghai, battered supply chains and pushed people to stockpile food.

Slower rises in food and energy costs pushed inflation lower. Food prices rose 0.4 per cent in April from a year earlier, compared with a 2.4 per cent increase in March, with pressures on pork prices waning.

Producer price deflation is also being driven by falling costs for commodities, like iron ore and crude oil. BLOOMBERG