MNI: China’s Tame CPI Allows Stimulus To Ward Off Deflation

China’s inflation may edge higher after April but will remain tame in 2023, giving policymakers leeway to provide additional support to an economic recovery and ward off deflationary pressures, policy advisers and economists told MNI.

Food price inflation is likely to be capped by increased pork supplies, while improvements in China’s domestic energy generation will also help lay the foundation for stable inflation, said Liu Zhicheng, senior fellow at the Academy of Macroeconomic Research. He said sufficient supplies should offset the recovery in demand as Covid controls are lifted. (See MNI: China Must Target Growth Above 5%, Refine Covid Controls)

“The consumer price index is expected to remain stable next year, while the producer one will expand at a slower pace than 2022, and the inter-connection between CPI and PPI will be strengthened,” said Liu.

November inflation data released on Friday showed China continued to buck the global trend of elevated inflation. According to National Bureau of Statistics, the Consumer Price Index rose 1.6% y/y last month, down from 2.1% in October thanks to cheaper pork prices. The Producer Price Index fell 1.3% on lower oil prices and weak domestic demand for commodities. (See MNI BRIEF: China's Nov CPI Falls To 8 Month Low; PPI Declines)

CPI could edge up after April and range between 1.8% and 2.5% in 2023 as pork prices are expected to fall in the first half of the year, said Cui Yu, a researcher at the Beijing Tengjing Institute of Big Data Technology. The PPI was expected to fall between 2% and 4% in the first half, followed by a third quarter rebound in wholesale prices. Deflation caused by weak demand is a bigger risk than inflation, and the ongoing weakness in PPI signals more deflation next year, she said.

The easing of deflation pressures would depend on an economic recovery, improved demand for commodities from the property and infrastructure sectors, and the outlook for global oil prices and OPEC supply, said Wu Wei, also a researcher from Tengjing Institute.

INFLATION RISKS

The PBOC highlighted inflation risks in its Q2 and Q3 monetary policy reports. Risks lie in imported inflation from disruptions to global energy supplies, the rapid growth of M2 in China, rising demand for pork and heating during the winter and the China Spring Festival, and a fast recovery of consumption after Covid controls are relaxed, Cui said.

But imported inflation and pork prices were not an immediate threat, Cui said. There is no clear evidence showing high M2 growth would boost CPI, especially given that fresh M2 flows have been directed into the property sector and local government funding vehicles. Consumption could take time to recover, she said.

Inflation will not be a policy focus next year, with signs of deflation more concerning as demand remains sluggish, said Shen Jianguang, chief economist at JD.com. Greater fiscal stimulus is needed to shore up consumption given soft demand and slow transmission of the PBOC’s easing moves.

However, imported inflation still needs to be watched. Shen said the Federal Reserve's aggressive QE during the pandemic and the Biden administration’s fiscal stimulus will continue to push up demand for commodities. Energy prices may rise on geopolitical uncertainties and oil supply concerns, which will affect China. (See MNI INTERVIEW: China's Energy Costs To Jump As Growth Rebounds)

Liu said geopolitical risks, extreme weather, and shipping disruptions could disrupt energy supplies, and also noted that the rising risk of a global recession and monetary policy uncertainty in major economies could impact China’s inflation.

Policymakers should take measures to boost the economy and confidence of markets and companies, Wu said. They should also seek to prevent sharp falls in the yuan, advance yuan internationalisation, and strengthen supply chain resilience, he continued.