China’s consumer price index moved back into a positive area in December, raising hopes that the country’s economic recovery will further strengthen demand at a time when core inflation remains weak.
The country’s consumer price index dropped expectations 0.2 percent higher in December than year-on-year after falling 0.5 percent a month earlier, with the rise being driven mainly by food prices.
The price growth in China has been anemic in recent months despite the rapid recovery of the country from the coronavirus, which is driven by industrial production, as new cases have remained low.
China’s gross domestic product is expected to have grown by 2.1 percent last year, compared to the expected contraction in other economies.
Nuclear inflation, which excludes food and energy prices, fell to 0.4 percent year-on-year in December – lower than at any point since the outbreak of the coronavirus and the worst level since early 2010.
Sustained low levels of inflation have created a mystery for policymakers as other parts of the economy continue to heat up. The People’s Bank of China lowered the standard lending rates last year, but the government has meanwhile moved on to curb the real estate sector.
“As economic activity is likely to remain strong and underlying inflation is likely to recover, we think the PBOC will tighten policy this year,” said Julian Pritchard-Evans, China’s senior economist at Capital Economics.
However, he added that consumer prices could return to deflation in the coming months due to the sharp rises in pork prices last year.
The outbreak of African swine fever in the summer of 2018 led to the elimination of millions of pigs, which increased the price of pork – one of the most important components in China’s consumer price index. In July, pork prices rose 86 percent year-on-year.
Chinese factory gate prices, which were in a negative area for most of last year, fell 0.4 percent year-on-year in December, exceeding economists’ expectations. In terms of month-on-month, the producer price index rose 1.1 percent, the fastest rate in more than four years.
Iris Pang, chief economist for Greater China at ING, suggested that the increase was driven in part by an outbreak of coronavirus in Hebei Province, which disrupted supply. China reported on Monday that new business has surpassed 100 for the first time since July, with almost all new domestic business in Hebei.
But Pang added that both CPI and PPI would have to rise in 2021.
“After the Chinese New Year, we should see the demand increase,” she said.