Xu Hongcai: Year-on-year PPI rise is only 0.1% in January, a warning sign of deflation

According to the data released by China’s National Bureau of Statistics on February 15, the national Consumer Price Index (CPI) rose by 1.7% year-on-year in January 2019, a 0.5% increase from the previous month.

Dong Yaxiu, director of the Urban Department of the National Bureau of Statistics, explained that the increase in the CPI in January is mainly affected by the holiday factors. The prices of food, fresh vegetables, fruits, seafood, lamb, beef and eggs experienced an increase. In terms of non-food prices, airline tickets, travel agency fees and long-distance bus tickets also rose to a certain extent due to increased demand during the school winter vacation and Chinese new year. Furthermore, some of the service prices rose significantly due to the fact that the massive number of migrant workers are returning back to their hometown for the Chinese new year.

“From the average of the past three years, the CPI increase was higher in the month before the Chinese Spring Festival. In January this year, the CPI rise was slightly slower than expected but generally speaking, the prices fluctuate at a moderate level,” said Niu Li, deputy director of the Economic Forecasting Department at China’s National Information Center.

The previous information of the Wind Data Feed Services showed that the average forecast of the 12 major research institutions for the year-on-year CPI increase was 1.8%. The highest forecast value is 2.0% and the lowest value is 1.7%. In fact, the CPI in January rose by 1.7% year-on-year, 0.2 percentage points lower than the previous month.

Tang Jianwei, deputy general manager and chief researcher of the Financial Research Center of the Bank of Communications, told the Times Weekly that the slower food price increase is the main reason for the decline in CPI. According to data released by the National Bureau of Statistics, food prices rose 1.9% year-on-year in January, 0.6 percentage points lower than the previous month; while non-food prices rose 1.7%, as same as last month.

Many industry insiders predicted that the CPI will remain stable in 2019 and it will not fluctuate rapidly.

At the same time, the National Bureau of Statistics also released the Industrial Producer Price Index(PPI) data for January 2019: the PPI fell by 0.6% from the previous month and rose by 0.1% year-on-year.

The decline in PPI is related to the falling price of production materials. From the same period of last year, the price of production materials fell by 0.1%, while the price of living materials rose by 0.6%, a drop of 0.1 percentage points from the previous month. The price of oil and gas exploration also fell by 5.0%, and the price of petroleum, coal and other fuel processing industries fell by 1.6%.

Tang Jianwei believes that the PPI is likely to continue falling and become a negative value in the next few months.

Xu Hongcai, deputy chief economist of the China Center for International Economic Exchanges told the Times Weekly reporter that the slow PPI increase reflects weakening industrial demand and a slowdown in production and we should be alert to the possible deflation. He suggested that the government should relax monetary policy appropriately and ensure adequate and stable liquidity by reducing the RRR so as to create a good monetary and financial environment for the stable and healthy development of the real economy.

Niu Li has a different view in this regard. He believes that the current PPI volatility only reflects the situation in the industrial production sector, and it does not mean that the overall economy will experience deflation. At present, many industrial sectors are facing overcapacity problems, the prices in other categories such as service industry have become more important while the impact of industrial product prices is weakening, implying that the impact of PPI fluctuation cannot be transmitted to the consumer sector.

Niu Li believes that with the central bank’s announcement of a 1 percentage point reduction in RRR, the tax cuts of 200 billion yuan for small and micro enterprises and the issuance of local bonds, the economy will remain stable at the beginning of 2019.