April 11, 2019 / 3:14 AM / a month ago

China producer inflation picks up for first time in nine months, eases deflation worries

BEIJING (Reuters) - China’s factory-gate inflation picked up for the first time in nine months in March, lifted by price rises in global commodities as well as signs that government efforts to boost the economy may be putting a floor under domestic demand.

Pork for sale is seen at a supermarket in Beijing, China, April 11, 2019. REUTERS/Jason Lee

Consumer inflation also quickened, jumping to the highest since October 2018 as pork prices soared due to a growing epidemic of swine fever, official data showed on Thursday.

The step-up in producer inflation, while slight, will ease deflation worries and likely add to optimism that the world’s second-largest economy is starting to turn the corner. Recent surveys showed factory activity expanded for the first time in months in March.

But analysts urge caution, saying it will take a few more months of better data and further policy support from Beijing to see if a recovery can be sustained.

China’s producer price index (PPI) in March rose 0.4 percent from a year earlier, driven largely by rapid rises in oil and gas prices, and advancing from a 0.1 percent increase in February, the National Bureau of Statistics (NBS) said.

That was in line with analysts’ forecasts in a Reuters poll.

Most of the gain was in mining, with prices rising 4.2 percent on-year, up from 1.8 percent in February. Drops in raw material prices also moderated.

Beijing is fast-tracking more infrastructure projects, which is pushing up prices of construction materials.

Surging iron ore prices hit a record domestically on Tuesday, fuelled by concerns over tight global supply after disruptions to production and shipments at top miners in Brazil and Australia. Prices of steel reinforcing bars used in building hit a 7-1/2 year high this week.

But underlying demand in other parts of the economy still appears subdued. Prices of consumer durables fell for a second month, pointing to weakness in demand for big-ticket items such as cars and appliances.

“Looking ahead, we expect oil prices to fall back in the coming months. This will drag down PPI... Meanwhile, continued economic weakness is likely to keep a lid on broader price pressures,” said Julian Evans-Pritchard, Senior China Economist at Capital Economics.

On a monthly basis, producer prices increased for the first time in five months. The index inched up 0.1 percent, compared with a 0.1 percent decrease in February.

The world’s second-largest economy is growing at its weakest pace in almost three decades amid weaker domestic demand and a year-long trade war with the United States. Multi-year campaigns to curb debt risks and pollution have deterred fresh investment.

Last month, the government announced nearly 2 trillion yuan (227 billion pounds) in additional tax cuts to ease the pressure on corporate balance sheets, while authorities are pressing banks to keep lending to struggling smaller firms.

Cuts in value-added tax (VAT) that kicked in on April 1 have already led authorities to reduce prices for electricity and natural gas. Retail gasoline and diesel prices are to be reduced as well.

A growing number of companies ranging from Apple Inc to BMW have lowered prices for their products following the tax cuts.

SWINE FEVER DRIVING UP PORK PRICES

The consumer price index (CPI) in March rose 2.3 percent from a year earlier, a five-month high, largely due to higher pork prices as the spread of African swine fever prompts farmers to cull their herds.

That was more than a 1.5 percent increase in February but just below market expectations for a 2.4 percent rise.

Pork prices rose 5.1 percent in March from a year earlier, the first increase after a 25-month declining streak.

On a month-on-month basis, CPI rose 1.2 percent.

Slideshow (2 Images)

Some analysts forecast pig production in China, which eats about half of the world’s pork, will fall by around 30 percent in 2019, which would send meat prices soaring.

But economists say the central bank is unlikely to overreact to a food price spike if it appears temporary and core inflation, which strips out volatile energy and food prices, remains steady.

Non-food consumer inflation was 1.8 percent on-year, just a touch more than February.

Reporting by Stella Qiu and Se Young Lee; Editing by Kim Coghill

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