Published: 2023-07-10T13:13:29.000Z
China: The Swing Towards Negative Inflation
Director of Research , Macroeconomics and Strategy
-
Bottom Line: China zero Yr/Yr inflation rate reflects broad based weakness and suggests that at a minimum a temporary phase of negative inflation prints on a Yr/Yr basis could be seen. We will likely revise down our 2023 and 2024 below consensus CPI inflation forecasts (+0.8% and +1.5%) once we see the real sector number mid-month. However, we would not see this as a prolonged deflation phase for China and project we should see small to modest positive CPI numbers into 2024.
The breakdown of the June CPI data reinforces the weak trajectory seen for inflation and key points to note include
- Broad based softness ex food. Food rose 2.6% Yr/Yr, but energy prices are now clearly benefitting from the lower trajectory of oil and coal prices compared to 2022. Ex food and energy also slowed to +0.4% Yr/Yr from +0.6%.Consumer goods are now -0.5% Yr/Yr, both due to a peaking of consumption growth for goods and also excess production in certain goods. Services at +0.7% is broadly consistent with the recent trend and is likely being supported by the still healthy momentum for consumption services compared to consumption of goods. On a wider basis this reflects the two tier economy that we highlighted in the June Outlook (here). Meanwhile, headline inflation has been negative now for the last five months.
- Negative inflation Yr/Yr coming? It is feasible that the Yr/Yr rate could dip to be negative in the next few months, given the lagged effects of excess production over demand. Excess production is being amplified by the global economic slowdown, which is redirected some goods domestically and subduing price pressures. Meanwhile, the post COVID pent up demand has already peaked in momentum terms in Q1, though in absolute terms a further recovery in consumption remains feasible. What is emerging is that the consumption services pick-up is insufficient to produce a quick pick-up in inflation pressures domestically.
- Not Deflation though. We would not at this juncture see a multi-year deflation phase occurring in China however.Part of the weakness is related to the fall in energy prices, which we do not see lasting and expect a bounce in oil prices in H2 (here). Additionally, further policy stimulus is likely from China authorities, both as they want to maintain growth momentum and also avoid a Japan style deflation that then triggers a debt triggered recession. China authorities’ desire for long-term stability means policy easing at times like these. Even so, the June 10bps cut in official rates is not enough and we need to see more action in additional fiscal and monetary policy easing to ensure that further downside risks on the economy and inflation numbers are avoided.