Top Stories
Top Stories
China Economy

China's slowing inflation leaves 'plenty of room' for central bank to cut rates, analyst says

Key Points
  • The Producer Price Index in December rose 0.9 percent from a year ago, lower than the 1.6 percent economists were expecting in a Reuters poll.
  • Consumer Price Index — a gauge of prices for goods and services — rose 1.9 percent on year in December, lower than economists' expectations of a 2.1 percent growth, according to a Reuters' poll. The CPI rose 2.2 percent in November.
Residents shopping in a supermarket on August 9, 2013 in Lianyungang, Jiangsu Province of China.
ChinaFotoPress | Getty Images

China's producer inflation rose less than expected for the month of December to hit the lowest growth rate in two years, official data showed on Thursday.

The Producer Price Index in December rose 0.9 percent from a year ago, lower than the 1.6 percent economists were expecting in a Reuters poll. The index, which measures price increases before they reach the consumer, was also the lowest since September 2016, according to Reuters' records. PPI in December was much lower than the 2.7 percent year-on-year increase in November.

Although the data indicated that lower energy prices drove the lower-than-expected growth, there was also a broader decline in price of industrial inputs and final consumption goods, which was "consistent with evidence elsewhere of cooling domestic demand," said Julian Evans-Pritchard, senior China economist at Capital Economics.

If anything, cooling factory gate inflation will strengthen the case for the central bank to do more to ease financial pressure on industrial firms including by cutting benchmark lending rates.
Julian Evans-Pritchard
senior China economist at Capital Economics

China's Consumer Price Index — a gauge of prices for goods and services — rose 1.9 percent on year in December, lower than economists' expectations of a 2.1 percent growth, according to a Reuters' poll. The CPI rose 2.2 percent in November.

The latest data brought China's PPI for January to December 2018 a rise of 3.5 percent, while full-year CPI was up 2.1 percent — below Beijing's target of 3 percent in consumer inflation for the entire year.

"Rapidly falling inflation, especially factory-gate PPI inflation, is further evidence that China's economy is slowing at a worrying pace," Nomura economists wrote in a note on Thursday.

The slump in producer inflation suggests corporate earnings would fall in the coming months, they added.

Analysts say the latest data could lead to further easing measures by the government as it seeks to stimulate the economy.

The slower inflation will give Beijing "plenty of room to loosen (monetary) policy," said Evans-Pritchard in a note on Thursday. "If anything, cooling factory gate inflation will strengthen the case for the central bank to do more to ease financial pressure on industrial firms including by cutting benchmark lending rates."

"Falling inflation leaves more room for Beijing to roll out more aggressive policies to bolster growth and could lead to lower interbank rates and bond yields," the Nomura analysts added in their note.

Economic data from the world's second-largest economy are being closely watched for signs of damage inflicted by the trade war between and

VIDEO4:4704:47
How do tariffs work?

While official data indicated China's economy held up for much of last year, as production metrics and export orders fall as the country's trade dispute with the its largest trading partner, drags on.

Beyond the tariffs battle, China's economy has been facing its own domestic headwinds. Even before U.S. President kicked off the latest escalation in trade tensions, Beijing was already trying to manage a slowdown in its economy after decades of breakneck growth.

Both sides have been trying to negotiate a deal, with the latest round of talks between Chinese and U.S. officials concluding on Wednesday.

China's Commerce Ministry said Thursday that the talks were extensive and established a foundation for the resolution of each others' concerns.