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China’s Producer and Consumer Inflation Cools in December

Producer Price Index falls to a two year low in December 2018

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The latest consumer and producer prices index data from China continued to show that inflation was falling at a faster than expected pace. The data raised concerns on whether the slowdown was a result due to the tariffs imposed by the United States.

The data set comes as the United States and China are carrying out trade negotiations after agreeing to a 90-day truce to chalk out the details of a possible agreement. While the first round of trade talks has concluded, a cabinet-level discussion is expected to be held later this month.

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Producer Prices Fall to a Two-Year Low

Producer Prices Index data rose less than it was expected to in the month of December. China’s PPI, as a result, fell to the lowest level in two years, according to official data.

The producer price index in December rose just 0.9% on the year. This was lower compared to the median estimates which forecast an increase of 1.6% for the period. The Producer Price Index measures the prices paid at the factory gate before reaching the consumers.

The reading was the lowest since September 2016 and posted a sharp decline compared to November’s PPI data of a 2.7% increase on the year.

The data indicated that the declines came due to lower energy prices resulting in a less than anticipated growth rate. But besides the falling energy prices, other data sets indicate that industrial output and final consumption of goods had also weakened.

This was consistent with the prevailing narrative that growth was cooling domestically, while global growth was also easing.

Consumer Price Index Declines in December

The Consumer Price Index which is a gauge for the prices of goods and services paid increased 1.9% on an annualized basis in December. China’s inflation rate for December missed the median forecasts of a 2.1% increase.

In November, China’s inflation was at 2.2%.

The decline in both the consumer and producer prices in December 2018 showed that China’s Producer Price Index grew at a rate of 2.5% for the whole year while Consumer Price Index rose 2.1% for the year 2018.

Consumer Price Index was seen settling well below the inflation target rate of 3% for the year. The data underlined the seriousness of the falling CPI which is now expected to push the Peoples Bank of China to react with some monetary policy action.

Falling Producer Price Index data suggests that corporate earnings could also decline in the coming months. The data adds to the speculation that further easing measures could be undertaken by the government in order to stimulate the economy.

The cooling producer prices could prompt the PBoC to ease the financial pressure with some policy actions such as cutting the benchmark lending rates. The falling consumer prices also give China’s central bank more room to act.

Economists are closely watching the economic data from the world’s second-largest economy for any signs of slowing on account of the trade wars. So far, official data from China has managed to remain steady. But production metrics show that with falling export orders, the trade wars saga could likely drag on.

Besides the trade war headwinds, China’s economy has seen cooling on the domestic front as well. Later this week, China will be releasing its industrial production figures and trade balance numbers, culminating with the release of the fourth quarter GDP data.

The figures will be closely watched and a possible hint of decline in the numbers could add further pressure on China as it is currently negotiating with the United States. The 90-day true on trade wars is expected to end in March.

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