China inflation: 4 takeaways from September’s data as consumer prices remained flat

“China’s headline CPI edged down to 0 per cent growth as lower food prices outweighed higher oil prices and was a touch softer-than-expected,” economists at HSBC said.

Within CPI, overall food prices dropped by 3.2 per cent year on year last month, while pork prices – which have a high weighting in China’s CPI basket – fell by 22 per cent, compared to a fall of 17.9 per cent in August.

“CPI inflation at zero indicates the deflationary pressure in China is still a real risk to the economy,” said Zhang Zhiwei, president and chief economist at Pinpoint Asset Management.

“The recovery of domestic demand is not strong without a significant boost from fiscal support. The damage from the property sector slowdown on consumer confidence continues to weigh on household demand.”

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CPI in the first nine months of the year, meanwhile, rose by 0.4 per cent year on year, far below Beijing’s annual control target of 3 per cent.

Services prices, meanwhile, rose by 1.3 per cent in September compared to a year earlier, staying at its highest level in 19 months.

2. Producer price deflation continues to ease

China’s producer price index (PPI) – which reflects the prices that factories charge wholesalers for products – fell by 2.5 per cent in September, narrowing from a fall of 3 per cent in August. The indicator has fallen for 12 months in a row.

Wind had predicted a PPI fall of 2.4 per cent last month.

A pickup in global oil and commodity prices and domestic construction activity helped to ease PPI deflation, analysts at HSBC said.

“Producer price deflation continued to ease last month. This partly reflects the fading base effects due to Russia’s invasion of Ukraine,” analysts at Capital Economics said.

“But factory-gate prices also increased 0.4 per cent in month-on-month terms, the most in 18 months. The biggest increases were in energy and metal prices, at least partly reflecting China’s strong commodity demand.”

3. Core inflation steady

Core inflation, which receives more attention from policymakers as it excludes volatile food and energy prices, remained at a six-month high after rising by 0.8 per cent last month, following 0.8 per cent growth in August.

“Volatile components aside, core CPI inflation stayed steady at 0.8 per cent year-on-year, highlighting domestic consumption remains stable, with services consumption continuing to be a driving force for the recovery this year,” HSBC analysts said.

China’s consumer inflation flat, factory prices fall for 12th month in a row

4. Policy support still needed?

Capital Economics expects headline PPI inflation to remain negative for the rest of the year, while they believe factory-gate deflation will become less severe “as the partial economic recovery gains traction”.

Analysts at Nomura expect CPI inflation to turn negative again in year-on-year terms in October, at minus 0.1 per cent due to declining food prices.

Robert Carnell, regional head of research for Asia-Pacific at ING, expects China’s CPI to likely only just push above 1 per cent in 2024, up from their forecast of 0.5 per cent for 2023.

“The inflation print suggests that ongoing policy support is needed for domestic recovery to sustain the recovery momentum,” HSBC analysts said.

“For instance, China just closed the ‘golden week’ holiday, and the number of domestic trips and related spending increased from the pre-pandemic levels, but fell short of earlier expectations.

“The still-soft inflation backdrop gives the [People’s Bank of China] the space to stay accommodative and to support growth.”