China’s factory inflation cools to its slowest pace in 14 months

China’s factory-gate inflation cooled to its slowest pace in 14 months in May, depressed by weak demand for steel, aluminium and other key industrial commodities due to tight COVID-19 curbs and bucking the global trend of rapidly accelerating prices.

The producer price index (PPI) rose 6.4 per cent year-on-year, the National Bureau of Statistics (NBS) said on Friday, after an 8.0 per cent rise in April and in line with forecasts in a Reuters poll. It was the weakest reading since March 2021.

The consumer price index (CPI) gained 2.1 per cent from a year earlier in May, in line with April’s growth. In a Reuters poll, the CPI was expected to rise 2.2 per cent.

The cooling inflation marks a sharp contrast to decades-high readings seen in other major economies and reflects the slump in demand due to China’s strict COVID-19 controls, which has chilled factory and retail activity in recent months.

The modest price pressures also allow China’s central bank to release more stimulus to prop up the economy even as monetary authorities in most other countries scramble to hose down inflation with aggressive interest rate hikes.

“Factory gate inflation will continue on its downward trajectory throughout the rest of the year,” said Sheana Yue, China Economist at Capital Economics.

“Further policy rate cuts before long - the first of which might come as soon as next Wednesday,” she noted, referring to the People’s Bank of China’s medium-term liquidity operations next week.

The world’s second-largest economy has slowed significantly in recent months, hit by strict COVID-19 controls, disrupting supply chains and jolting production and consumption.

China’s cabinet in late May announced a package of 33 measures covering fiscal, financial, investment and industrial policies to revive its economy.

Last month, widespread COVID-19 lockdowns shut factories and stores, choking purchases of metals-intensive products from cars to appliances.

Chinese auto sales grew in May from April but were still down 16 per cent year-on-year, according to the Chinese Passenger Car Association.

The urban jobless rate rose to 6.1 per cent in April, the highest since February 2020 and well above the government’s target ceiling of 5.5 per cent.

Non-food prices rose 2.1 per cent from a year earlier, 0.1 percentage point slower than the previous month, affecting the CPI by about 1.68 percentage points, the NBS said in a separate statement.

On a month-on-month basis, CPI fell 0.2 per cent, swinging from a 0.4 per cent rise in April.

“The CPI inflation remained stable. The rising commodity prices were offset by weak service prices such as travel and entertainment,” said Zhiwei Zhang, Chief Economist at Pinpoint Asset Management.

“The transmission from PPI to CPI has turned out to be muted, because of weak domestic demand.”

Beijing has taken a series of measures from cutting benchmark lending rates to allowing delays on loan repayments to arrest the economic slowdown.

Goldman Sachs last month lowered its 2022 growth forecast to 4 per cent from 4.5 per cent, below China’s official target of around 5.5 per cent.

Meanwhile China’s auto sales fell 12.6 per cent in May from a year earlier, data showed on Friday, but the extent of the decline improved from April’s falls as authorities rolled out stimulus to support a market depressed by the country’s COVID-19 lockdowns.

Overall sales in the world’s biggest car market fell to 1.86 million vehicles in May, data from the China Association of Automobile Manufacturers (CAAM) showed.

However, May sales rose 57.6 per cent month-on-month from April, when the market was badly hit by COVID-19 lockdowns in several cities and saw sales that month almost halve year-on-year.

Sales in the first five months were 12.2 per cent lower from the same period in 2021, CAAM said.

China’s auto sector has been hit hard in recent months by China’s efforts to combat Omicron this year, which saw the country put many parts of the country including Shanghai under stringent lockdown.

Authorities are trying various incentives to revive the market, with the latest being a halving of the purchase tax for cars priced at no more than 300,000 yuan ($45,000) and with 2.0-litre or smaller engines to 5 per cent of the sticker price from June 1.

The move could lead to an increase of 2 million extra car sales this year, according to the China Passenger Car Association (CPCA), another industry body.

The country’s most congested cities, including Shanghai and Shenzhen, have increased car ownership quotas while local governments are also subsidising people who exchange their old combustion cars for new electric ones.