March 10, 2020 / 2:42 AM / in a month

China February producer prices fall back into deflation, more easing steps seen

BEIJING (Reuters) - China’s producer prices swung back into deflation territory in February as the coronavirus epidemic braked economic activity, raising the prospect of more policy stimulus even as consumer inflation stayed elevated on high food costs.

FILE PHOTO: Employees wearing face masks work on a car seat assembly line at Yanfeng Adient factory in Shanghai, China, as the country is hit by an outbreak of a new coronavirus, February 24, 2020. REUTERS/Aly Song

Beijing has rolled out a raft of measures to cushion the blow from the health crisis amid fears of widespread job losses but analysts don’t expect consumer inflation near eight-year highs to be a major hurdle for policymakers.

The producer price index (PPI) fell 0.4% in the year to February, National Bureau of Statistics data showed on Tuesday, as strict containment measures to curb the spread of the virus caused severe disruptions to the flow of goods and people throughout the economy.

Analysts had expected PPI to fall 0.3% from a year earlier. Prices ticked up 0.1% in January after six months of declines.

“I think the decline will deepen due to weaker oil prices. The shock from the COVID-19 and collapse of oil prices have overshadowed the positive restocking sentiment on the back of improving U.S.-China trade talks,” said Tommy Xie, China economist at OCBC Bank in Singapore.

China implemented large-scale quarantine measures and limited production at factories to contain the contagious disease, which has infected more than 80,000 people and claimed over 3,000 lives in the mainland alone.

The outbreak which began late last year likely halved China’s economic growth in the first quarter compared with the previous three months, triggering expectations for more interest rate cuts, according to the latest Reuters poll.

MORE EASING EXPECTED

The People’s Bank of China has ramped up policy support for the economy and eased borrowing costs for companies hardest hit by the outbreak. More easing steps, including further cuts in banks’ reserve requirements, are widely expected.

“Declining core inflation and deepening factory-gate deflation will increase pressure on the PBOC to ease monetary conditions further,” Julian Evans-Pritchard, senior China economist at Capital Economics, said in a research note.

Nomura forecasts PPI could drop further to negative 1.0% in March on falling oil prices and oversupply of upstream raw materials

Chinese policymakers have signalled that Beijing will continue to roll out fiscal and monetary steps in the coming weeks to nurse the economy back to health and have urged most parts of the country to resume business activity.

Consumer prices in February rose 5.2% from a year earlier, in line with expectations and not far from 5.4% in January - the highest since October 2011.

Food prices jumped 21.9%, led by a 135.2% jump in pork prices, while non-food prices rose 0.9%, the data showed.

The virus outbreak has pushed up prices of some food items, such as pork and vegetables, and medical goods such as masks and hygiene products.

FILE PHOTO: A vendor is seen in her store at a supermarket in downtown Beijing, China, May 23, 2019. REUTERS/Jason Lee

However, core inflation - which excludes food and energy prices - remained benign last month at 1.0%,down from 1.5% in January.

Analysts at Goldman Sachs said in a note before the data that elevated consumer inflation will not be a major constraint for the central bank given its priority to support the economy.

“We expect the balance towards growth stability to continue in the near term. But elevated inflation may limit the room for interest rates to decline rapidly,” they said.

Additional reporting by Se Young Lee; Editing by Jacqueline Wong

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