China’s CPI at 0.1% is the slowest in two years

According to the National Bureau of Statistics (NBS), consumer prices in China rose by just 0.1% in April from a year ago, the lowest rate of inflation in two years. This suggests that there is weakness in domestic demand and raises questions about the strength of the economic rebound.

The producer price index, which measures factory-gate prices (prices at which factories sells goods to wholesalers), also declined by 3.6%, marking the biggest contraction in three years. This is the seventh straight month that the figure has fallen. The weak property sector recovery likely has exerted "persistent" downward pressure on factory-gate prices.

Real estate contributes as much as 30% to China's GDP and is still in the midst of a historic downturn, with new home prices increasing less than 0.5% in both March and February, after falling for more than a year. A slump in the property sector affects demand for key raw materials such as steel and cement, which are key parts of the producer price index.

Imports plunged 7.9% in April, indicating weak domestic demand, while exports were up 8.5% from a year ago, although slower than the 14.8% growth recorded in March. There is a danger that people are hoarding cash, which is bad for the economy because in such an environment, consumers and companies may put off spending in anticipation of prices falling further. This is a danger of stagflation and would only exacerbate economic problems. In this regard, some government economists have recently warned of deflationary pressure, but Chinese authorities have dismissed this, with a spokesperson from the NBS saying that the Chinese economy "does not appear deflated" and that deflation is unlikely in the near term.

Nevertheless, looking ahead, consumer inflation is expected to remain "fairly soft" in May, likely around 0.3%, while producer deflation is likely to deteriorate.

Russell Shor

Senior Market Specialist

Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.

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