However, the 2.1% year-on-year increase in the consumer price index (CPI) in April is well below that recorded by most developing countries and major economies such as the United States. The increase was just 0.4% month-over-month.
Data released on Wednesday also showed factory gate inflation eased slightly in April, with the producer price index (PPI) rising 8% year-on-year from 8.3% a year earlier. months earlier.
The gap between factory gate inflation – driven by high energy, material and transport costs – and consumer price inflation reflects retailers’ reluctance to pass inflation on to production in a soft market.
While this moderation is moderate, it is enough to give the Chinese government room to trigger stimulus and cut interest rates further. Whether that will happen, however, remains to be seen as Beijing is sending mixed messages about how it plans to tackle the economic downturn. President Xi Jinping’s only priority appears to be keeping COVID-19 zero.
Economists say that while food hoarding and a lack of supplies in lockdown cities like Shanghai drive up prices in the near term, consumer spending will actually become more depressed as households dip more into their savings to spend from long periods without income.
While the government promises to help small businesses, anecdotal evidence suggests many are facing financial ruin. The threat of repeat lockdowns and business shutdowns also means consumers are unlikely to start spending on anything other than essentials again for long.
“If the lockdown measures last for an extended period, consumption and investment demand could be depressed due to lower household incomes, lower savings and rising uncertainty, which would add disinflationary pressures,” said Nomura’s chief China economist, Ting Lu.
The Chinese government set an inflation target of 3% in March, which it now seems to easily achieve. Indeed, soaring commodity prices and rising logistics costs are overshadowed by low consumer price inflation.
Demand has not recovered
Morgan Stanley analysts this week lowered their forecast for China’s headline CPI for 2022 by 40 basis points to 1.5%.
That compares to inflation of 5% or more for nearly three-quarters of the world’s emerging and developing economies, according to the World Bank.
Inflation in China is relatively low as consumer demand never recovered from the first outbreaks of COVID-19 in the country in 2020.
China hasn’t provided the big stimulus packages to households and small businesses during the pandemic that countries like Australia have, leaving them to dip into their savings and tighten their purse strings.
The price of pork, which is seen as a barometer of consumer inflation in China, is much cheaper today than it was a year ago when supplies were tight. Pork fell 33.3% year-on-year in April, but was up 1.5% from the previous month.
However, the price of other staples such as vegetables, fruits and eggs jumped in April, partly due to households in Shanghai and other cities hoarding supplies in case they could not leave their homes to do their shopping.
While runaway inflation is something Xi need not worry about at the moment, his fixation on COVID-19 means there are other problems as large parts of the world’s second-largest economy stop.
Some stimulus measures, such as a promised increase in infrastructure spending, are on hold in many parts of the country as construction and factory workers cannot leave their homes. Local governments have also distributed digital coupons offering discounts on certain goods and services to try and entice people to spend.
“Despite the introduction of some consumer-friendly policies, we believe that a protracted battle against COVID-19 outbreaks will dampen the recovery in consumption/services, and therefore slow the rate of inflation increase by core/services CPI,” said Jian, Barclays China chief economist. Chang said.
Barclays forecasts inflation of 2.3% for the year as a whole.