China’s CPI Inflation Normalises, PPI Deflation Persists After Effects Of Lunar New Year Faded: Maybank Research

Headline Inflation Falls to +0.1% After Festive Blip

China’s CPI inflation fell to +0.1% in March from +0.7% in February after the distortionary effects of the “moving Lunar New Year” faded.

Maybank Research Pte Ltd Regional note on China Economics released today (Apr 12) said this is in line with their expectations of inflation normalising to around zero in March. Inflation had swung sharply in Jan-Feb 2024, due to the LNY occurring in Jan 2023, but moving to Feb this year. Core inflation also normalised to +0.6% in March (Feb: +1.2%), on par with the 4Q 23 average

Goods and Services Inflation Diverge on Manufacturing Glut

Within the CPI basket, services costs stayed resilient (+0.8%) while consumer goods prices (-0.4%) shrank for the 12th straight month. Elevated inventories in the consumer electronics and auto sectors continued to weigh on the cost of durables such as devices, vehicles and household appliances. Food price deflation (-2.7%) continued for the 9th straight month, weighed down by lower meat and vegetable prices.

However, the decline has narrowed from the -4% drop in 4Q last year.

PPI Deflation into 18th Month, Worsens to -2.8%

Producer Price Index deflation (Mar: -2.8% vs Feb: -2.7%) entered its 18th month and remains persistent. Deflation is especially entrenched in the mining (-5.8%) and manufacturing (-3.6%) sectors. There is scant sign of a turnaround, as producer price levels (-0.1% mom) have been sliding on a sequential basis, albeit at the slowest pace in five months. Industrial inventories continued to remain elevated, at similar levels to end-2022 — 42% above the pre-pandemic average .

Industrial Thrust to Cap Goods Prices, Cut 2024 PPI Inflation Forecast to -1%

PPI deflation, as well as softness in CPI durable goods inflation, could be drawn out, given limited progress in reducing supply gluts in segments including electronics and electrical products. The policy focus on incentivizing industrial production could add to the current industrial glut if domestic demand remains tepid, dampening prices.

Maybank Research maintains their projection for CPI inflation at +0.7% in 2024, on resilient services costs, but they now expect PPI inflation to average -1.0% (from the previous projection of +0.2%) in 2024. Maybank Research expects the central bank to keep policy moderately supportive and cut the one-year loan prime rate from the current 3.45% to 3.00% by end-2024.

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