China inflation misses Beijing target

China’s inflation data for March produced small positive surprises, but remained tepid, with little sign that Beijing’s easing measures to date have significantly cut worrisome deflationary pressure.

That has led many to predict more easing measures in the pipeline, including more cuts to reserve requirement ratios for banks, although there is debate over how effective those might be at juicing inflation.

In March, China’s annual consumer inflation rate (CPI) stayed flat at 1.4%, above a poll’s projected 1.3% level. Producer prices (PPI) fell slightly less than projected, contracting by 4.6% rather than the forecasted repeat of February’s 4.8% pace.

The March inflation data is the first in a batch of key economic data that will climax with the release of first-quarter growth numbers on Wednesday. PPI has now been in negative territory for three years, highlighting sustained pressure on profit margins at Chinese companies — in particular heavy industry — as Beijing struggles to restimulate headline growth.

The higher-than-expected CPI was driven by a sudden rise in pork prices, which have been a drag on CPI every month since December 2013. But consumer inflation is still far short of Beijing’s official 3% target for 2015, and some economists see that goal at risk.

“Consumer price inflation held steady in March, but we expect a drop in food price inflation to pull it lower over the coming months,” wrote Julian Evans-Pritchard, of Capital Economics, in a research note.

Producer prices were dragged down again by mining and raw materials components, last month. Yesterday’s data follows a surprise recovery in manufacturing activity for March, with the official Purchasing Managers’ Index (PMI) edging up to 50.1, from February’s 49.9 measure.

Policymakers have publicly expressed worry that the risk of deflation is rising for the world’s second-largest economy, as the drag from a property market downturn and widespread factory overcapacity is compounded by an uncertain global outlook and soft commodity prices. The People’s Bank of China has made multiple cuts to guidance lending rates, and one cut to reserve requirement ratios at banks. It also launched a long-awaited deposit insurance programme in April, but economists said those moves have had little impact on real borrowing costs.

“The weak inflation profile suggests that further monetary policy easing is still needed,” ANZ economists Zhou Hao and Liu Ligang wrote after yesterday’s data release.

Reuters