Data from China show a cooling in inflation in December, as compared to a broad retreat in price pressures and a higher base. Overall CPI increased by 1.5% year-on-year compared to the 2.3% increase in November. CPI decreased by 0.3% compared to the previous month. On the PPI, factory prices continued to cool in December as the government's efforts to increase energy supplies and stabilize prices left their mark. There is an increase of 10.3% in the producer price index compared to the previous year, from the 12.9% increase in November. Input and output prices sub-indices in the official December PMI data fell to their lowest levels since April 2020. Caixin China General manufacturing PMI data showed that input cost inflation fell to a 19-month low.
High-frequency indicators show that annual increases in prices of many raw materials and intermediate materials eased further in December, led by coal and oil prices. Food prices are probably starting to pull inflation down again. We see that pork prices show deep decreases year-on-year, while the rate of increase in vegetable prices slowed down sharply after the increase in November. The contribution of non-food components to inflation has also moderated, as utilities prices have slumped amid falling energy costs and new outbreaks of Covid-19.
There is some relief in producer and consumer-based inflation indicators. In addition to the moderate course of consumer inflation, the stagnation of producer prices is important in terms of making room for growth-supported policies. This may mean that the Communist Party and the PBOC act comfortably. There are risks of slowdown in the economy due to the variant, so the central government tends to increase fiscal policy expansion, especially infrastructure spending. In order to speed up the credit flow, the PBOC may evaluate the current situation as more RRR and medium-long-term loan interest rate cuts.
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