China: Consumer and producer price inflation both fall in December
Consumer prices dropped 0.30% from the previous month in December, swinging from the 0.40% rise recorded in November. December’s result marked the weakest reading since June.
Consumer inflation came in at 1.5% in December, down from November’s 2.3%. Annual average inflation rose to 0.9% in December (November: 0.8%). Finally, producer price inflation fell to 10.3% in December, from November’s 12.9%. Both consumer and producer price inflation readings were notably below market expectations, likely influenced by soft demand and the government’s recent moves to tame the prices of raw materials, particularly coal.
Consumer price inflation is forecast to average higher than its current level in 2022, propped up by a tougher base effect for pork prices. However, Covid-19 flare-ups and ensuing restrictions due to Omicron are likely to dampen the increase. Meanwhile, producer price inflation should ease this year, amid a high base of comparison and a stabilization of commodity prices.
On the implications for monetary policy, Ho Woei Chen, economist at United Overseas Bank, said:
“As […] PPI continues to moderate, this will provide a more conducive backdrop for the People’s Bank of China’s to ease its monetary policy in 1H22. […] To boost growth momentum, the monetary and fiscal measures will be frontloaded in 1H22 and we foresee another 10 bps cut to the 1Y LPR to 3.70% by end-2Q22. Another 50 bps reduction in the banks’ reserve requirement ratio is also likely to help guide lending rates lower.”