Economy | Factory-gate deflation eases as turnaround continues

China’s factory-gate deflation eased for the sixth straight month, adding to evidence that falling prices have turned a corner after more than four years of declines.
The producer-price index fell 2.6 percent, compared with a 2.8 percent drop a month earlier, the National Bureau of Statistics said yesterday. The decline was the smallest since late 2014. The consumer-price index rose 1.9 percent from a year earlier, compared with a median economist estimate of 1.8 percent and a 2 percent gain in May.
Factory-gate deflation that has persisted since early 2012, and was at its worst late last year, has been easing amid a rebound in property sales and higher commodities prices. Economists surveyed by Bloomberg project producer prices will turn positive in 2018. That would ease pressure on the People’s Bank of China to provide more stimulus to fight deflation, according to Raymond Yeung, an economist at Australia & New Zealand Banking Group Ltd.
“The negative PPI regime is about to end” and the CPI drop will be transitory as severe flooding boosts food prices, Hong Kong-based Yeung wrote in a report yesterday. “Price levels are generally steady and using monetary easing to mitigate deflationary risk is no longer required. The monetary policy stance of the PBOC will no longer be aggressive.”
The PBOC has kept the benchmark rate at a record low since October. Data due for release on July 15 may show economic growth slowed to 6.6 percent in the second quarter, according to economists in a Bloomberg survey. The expansion in gross domestic product in the first quarter was 6.7 percent, the slowest since early 2009.
While policy makers will be reviewing their stance after the release of quarterly GDP data, easing deflation is doing the central bank’s job for it, Tom Orlik, chief Asia economist at Bloomberg Intelligence in Beijing, wrote in a report yesterday. The PBOC will probably maintain an easing bias but a major addition to stimulus is unlikely, he said.
“Data show factory prices continuing to edge out of deflation,” Orlik wrote. “That’s a positive for corporate profits and credit demand, even as the overall impression of continued subdued prices reflects the weak state of the economy.” MDT/Bloomberg