Don’t panic, Chinese inflation is in a good place -Capital

China’s economy is beset with problems but inflation isn’t one of them, despite persistent factory-gate price weakness, according to Capital Economics.

Consumer price inflation rose to 1.6% in December, the latest official data show, up from 1.5% in November but a whisker below market consensus.

For Capital’s chief China economist, Mark Williams, this leaves it in something of a sweet spot, with pricing power “high enough to keep concerns about deflation at bay” but low enough to give policymakers “plenty of room” to loosen further. He is more sanguine than most about weakness in producer prices, which have now posted a 46th successive month of declines, with a 5.9% year-on-year fall registered in December.

“The rate at which producer prices are declining (5.9% y/y again in December) can be almost entirely explained by falls in global commodity prices,” Williams writes.

“Weakness of Chinese demand relative to global supply has been a big factor in the slide in commodity prices, but this price shift nonetheless leaves the Chinese economy better off,” he continues.

“In any case, a year after the steepest commodity price declines, producer price inflation should be on the cusp of a rebound.”

However, if the latest inflation numbers are indeed good news, Chinese markets aren’t feeling it so far. Indices there are still feeling the fallout from last week’s twin market shutdowns and are all off by more than 1%.

This post originally appeared here: https://news.markets/bonds/dont-panic-chinese-inflation-is-in-a-good-place-capital-8141/