Pork-Panic Sends China CPI To 6 Year Highs As Factory Deflation Deepens

China's producer prices deflated for the 3rd straight month, slumping 1.2% YoY - the biggest deflationary impulse since July 2016 - but, thanks to the explosion in pork prices (as 'pig ebola' spreads), Chinese consumers are facing the worst inflation since 2013.

  • China Sept CPI +3.0% YoY (2.9% exp and 2.9% prior)

  • China Sept PPI -1.2% YoY (-1.2% exp and -0.8% prior)

Source: Bloomberg

“The return to PPI deflation since July is not only acting as a drag on manufacturing investment, already under stress from U.S.-China trade tensions and supply-chain relocation, but also poses a major risk for onshore corporate debt refinancing,” Bo Zhuang, chief China economist at research firm TS Lombard, said before the data.

“Sustained PPI deflation, where the monthly rate remained below -2% for more than three to six months, would be a likely catalyst for the reversion to old-style credit stimulus.”

The biggest driver of China's consumer price inflation was food prices, which rose 11.2% (highest since Oct 2011), thanks to pork prices surging 69.3% YoY - the biggest spike since 2007.

Source: Bloomberg

The divergence between CPI and PPI is boxing Chinese officials into a corner, fearful of broad-based rate-cuts to rescue PPI from deflationary hell sending CPI even higher, but analysts are hopeful this is 'transitory'...

“Surging pork prices as a result of the African swine fever outbreak could cause headline consumer price inflation to increase beyond the 3% official target in the coming months,” Tommy Wu, senior economist at Oxford Economics Hong Kong Ltd, wrote in a report before the data. “But we don’t think that CPI inflation will rise substantially beyond the target and create a major constraint on Chinese monetary policy.”

Yuan showed little to no reaction to these mixed signals.

As we detailed previously, African swine fever, which has been raging across China, and Asia, has decimated pork supplies. 

Pork prices are likely to remain elevated for some time, said Betty Wang, a senior economist at ANZ. She said farmers had culled so many pigs that it would take a while for supplies to build up again. "If people feel that food inflation is going up, it may spur policy actions," she added, although it wasn't clear just how Beijing can find a quick and easy substitute to domestic farms.

An apparent trade truce between China and the US reached last Friday could be what China needs to stabilize its pork supplies. 

China has said it could import as much as 400,000 tons of pork as domestic supplies shrink. The country is likely to boost purchases of pork from the US in the coming weeks.