The fall in China’s consumer price and producer price indexes was not unexpected. Consumer price inflation, which fell to -1.6% year-on-year in February, had already fallen for nine consecutive months. Producer prices had fallen for two months in a row ahead of February’s even lower figure, -4.5% year-on-year.
Nor were the negative numbers surprising, especially given the effect on food prices of last year’s snowstorms, according to Lu Ting, an economist with Merrill Lynch. "These are year-on-year inflation numbers. It’s negative just because last year the base was high," he said.
Glenn Maguire, chief Asia-Pacific economist at Société Générale, points not just to a high base, but to weakness in commodity prices. Coal prices at Qinhuangdao port, considered a benchmark for China, were about US$81 in mid-March, down more than 40% since July 2008.
There has been less agreement about what these numbers mean. Some economists, including Lu, believe the figures are misleading because they suggest a move toward deflation where none exists. Because the number is a year-on-year figure, it could hide positive month-on-month inflation.
Others, however, point to a real risk of deflation for at least the first half of the year. "Prices are going to remain in negative territory and perhaps fall quite significantly over the year," said Maguire.
Reversal of fortune
Beijing’s concern is a reversal from last year’s, when it worried that expectations of inflation among consumers could reinforce rising prices. Now, the fear is that consumer expectations of deflation could lead them to put off purchases, sparking a deflationary spiral.
Jing Ulrich, chairman of China equities at J.P. Morgan, wrote in a recent research note that Beijing is likely to use monetary policy and consumption-boosting measures to avoid an extended period of deflation. Maguire disagrees, arguing that enough has already done on the policy front.
"With all the stimulus in place, there will be upward pressure on commodity prices … That should start to arrest any decline in deflation," he said.