China CPI Misses; PPI Inflation Is Lowest In Two Years

One day after China reported the worst trade data in over half a year, with the trade war with Washington finally hitting exports hard, which rose only 5% in November or half the Wall Street forecast of 9.9%...

... while import growth tumbled to just 3%, far below the 14% Wall Street estimate even as Chinese imports from the US plunged  25% in November from a year earlier, the single biggest monthly decline since January 2017 when China's economy and capital markets were reeling in the aftermath of the Yuan devaluation and Shanghai Composite bubble bursting...

... on Sunday the bad news continued, when Beijing reporting that CPI inflation slowed to just 2.2% yoy in November, below the 2.4% estimate and down from 2.5% in October, while PPI inflation decelerated further to 2.7% yoy in November, from 3.3% in October.

In sequential terms, headline CPI prices declined 1.5% in November, down notably from an increase of 3.5% in October.

Among major subcategories, inflation in fresh vegetables dropped to 1.5% yoy in November from 10.1% yoy in October, with a meaningful sequential contraction. The decline in pork prices slowed slightly further to -1.1% yoy in November from -2.3% yoy. Sequentially pork prices increased for the sixth consecutive month, although the pace of increase moderated slightly in November.

At the same time, non-food CPI inflation also slowed to 2.1% yoy in November from 2.4% yoy, primarily on what Goldman described as a high base effect (non-food prices up 3.4% mom s.a. ann. in November 2017), with prices down very slightly by 0.3% mom s.a. ann. Inflation in fuel costs went down markedly to 12.6% yoy in November from 22.0% yoy in October, while core inflation (headline CPI excluding food and energy) was unchanged at 1.8% yoy November. Inflation in medicine and medical care, which has been a major driver of the trend in core inflation in recent months, stabilized at 2.6% yoy in November, with a halt to its downward trend since September 2017.

Meanwhile, wholesale price PPI inflation moderated for the fifth consecutive month to 2.7% yoy in November, the lowest since November 2016 (headline PPI inflation turned positive in September 2016). This implies an annual rate of -1.8% (s.a.) in November, the first sequential decline since June 2017. Inflation in the petroleum industry decelerated the most, and inflation in ferrous/nonferrous metals and chemicals also moderated notably, though somewhat offset by a pickup of inflation in coal mining industry.

So what was behind the latest slowdown in consumer and producer prices?

According to Goldman, CPI inflation pressure eased in November, primarily on lower inflation in vegetable and energy prices. The sequential momentum of vegetable prices has been weaker than the average seasonal pattern in recent two months, but it appears to have been normalizing in early December based on daily vegetable prices data. Pork prices have been broadly consistent with our expectation, trending up on hog cycle, although the net impact of the hog diseases in November was negative due to the selloffs by producers of live pigs.

And while the risk of continued deflation is certainly a major headache for Beijing, Goldman believes that there is some hope that headline CPI inflation may rise back up slightly in the coming months, primarily on gradual normalization of vegetable prices, continued upward trend in pork prices (and low base), and the stabilization of inflation in health services.

On the other hand, the continued plunge in commodity prices will likely more than offset any headline price gains, with a negative PPI print almost certain in the coming months, with a subzero CPI to follow.