China’s January Factory Prices Fall Below Expectations

The decline in China’s January factory gate prices was steeper than anticipated, indicating that the heightened domestic demand that fueled consumer prices following the end of the zero-COVID policy was not yet powerful enough to revive the upstream sectors. The producer price index (PPI) fell by 0.8% YoY, following the 0.7% drop in the previous month, and exceeded the 0.5% drop estimated in a Reuters poll. The consumer price index (CPI) in January rose 2.1% YoY, higher than the 1.8% annual increase seen in December, according to the National Bureau of Statistics.

CPI growth was driven by a seasonal rise in spending during the Lunar New Year festival, with airfares, movie tickets, and travel prices increasing by 20.3%, 10.7%, and 9.3%, respectively. Analysts predict that China’s cost of living will increase in the coming months now that its zero-COVID policy has been dropped. The policy insiders expect China to maintain an inflation target of around 3% this year, as it was in the previous year.

Inflation is expected to remain lower compared to the high rates in Western countries, and monetary easing is more probable than tightening. Capital Economics senior China economist, Julian Evans-Pritchard, stated that “further cuts to policy rates” are expected soon, with the first one potentially coming next Wednesday.

Despite its position as the world’s second-largest economy, China continues to face significant challenges, including a struggling property sector, waning external demand for its exports, and near-record youth unemployment. The monthly decline in PPI of 0.4% was unexpected and appeared to show that the manufacturing sector was not yet operating at full capacity, according to Zhou Chao, the chief economist at Guotai Junan International.

The decrease in factory gate prices was unforeseen as China’s economic activity rebounded in January, with the official purchasing managers’ index (PMI) surpassing the 50-point threshold for the first time since September. The unexpected drop was attributed to declining input prices, such as chemicals, as well as lower crude oil and domestic coal prices. On the consumer side, food prices were 6.2% higher in January YoY, after rising 4.8% annually in December. Core inflation, excluding food and energy prices, increased to 1.2% last month from an annual gain of 0.7% in December.

Senior government officials have repeatedly expressed their determination to harness the purchasing power of China’s 1.4 billion citizens, following the nation’s sluggish economic growth in 2022, one of the weakest in nearly half a century.

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