China CPI inflation grows less than expected in Sept; PPI hits 4-yr high

Chinese consumer price index (CPI) inflation decreased less than anticipated in September, with holiday spending providing only limited support to local prices, while producer price index (PPI) inflation reached a four-year high. According to government data released on Wednesday, CPI increased by 0.9% year-on-year in September, slightly below the expected 1.0% growth and slightly higher than the 0.8% increase observed in the previous month. However, CPI rose by only 0.2% month-on-month, falling short of the anticipated 0.3% increase.

The September uptick in CPI was primarily attributed to heightened spending during the autumn festival holiday. Nonetheless, government data released last week revealed that consumer spending remained subdued, as factors such as a real estate slump, weak wages, and sluggish employment continued to exert pressure on consumer spending.

Producer price index (PPI) inflation, on the other hand, surged to its highest level since June 2022, driven by robust business spending and rising input costs due to artificial intelligence-driven demand and disruptions stemming from the Middle East conflict. PPI grew by 5.0% year-on-year in September, surpassing expectations of 4.4% and marking a significant acceleration from the 3.8% figure recorded in August.

The surge in PPI can be attributed to escalating raw material costs resulting from the Middle East situation, which subsequently pushed factory gate prices higher.

Inflation is expected to remain elevated in the near term, according to Capital Economics analysts, as tensions in the Middle East persist. However, they forecast that the external price shock will eventually subside, leading to a return of factory-gate prices to deflation and a subsequent decline in consumer price inflation to an average of just 0.4% the following year.

China has been battling a pronounced decline in inflation since the COVID-19 pandemic of the early 2020s, with consumer demand largely failing to rebound despite ongoing stimulus measures from Beijing. The Communist Party is anticipated to announce additional economic support during a significant meeting scheduled for later in October.