China Inflation Slows in February, Factory Deflation Returns

(Bloomberg) — China’s consumer inflation moderated in February, while producer prices returned to deflation.

• The consumer price index rose 5.2% last month from a year earlier, following a 5.4% gain in January, the National Bureau of Statistics data said Tuesday. However, food prices rose the fastest in almost 12 years on the continuing spike in pork costs.
• Factory prices slowed, with the producer price index registering a 0.4% decline on year, after rising 0.1% in January.

Key Insights

• Core inflation, which removes the more volatile food and energy prices, climbed 1%, the slowest rise since 2010.
• “The slowdown in core CPI to a 10-year low suggests demand was more affected than supply,” according to Xing Zhaopeng, an economist at Australia and New Zealand Banking Group Ltd. “With the global spread of Covid-19, external demand is expected to fall as well, and the recent plunge in oil price reinforces not only economic uncertainty but also deflationary expectations.”
• It will be hard to determine the exact effect on prices of the coronavirus outbreak, which worsened dramatically over the lunar new year period in late January and early February.
• A drop in demand such as that caused by shutdowns to curb the virus would pull prices down, but the supply limits caused by the quarantines and shutdowns could also push some price pressures higher.

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• The biggest contributor to consumer inflation was the cost of pork, which continued to skyrocket, up the most since 2007.
• Food prices rose 21.9% the most since April 2008, while pork prices, a key element in the country’s CPI basket, rose 135.2%. China’s pork output dropped more than 21% in 2019 after outbreaks of African swine fever decimated herds. That drove up the price of pork and other foods.
• “Looking ahead, upward pressure from food prices may weaken but remain considerable in the coming months, as the virus has interrupted the production of some foods, such as pork,” David Qu, an economist at Bloomberg Economics in Hong Kong, said before the data. “But weak demand for consumer goods should keep overall inflation in check.”

(Updates with more details and comments throughout.)