China industrial inflation slips again, CPI rises to 1.5% in May
China Database Team
Industrial inflation (PPI) in May rose at a much slower pace of 5.5% y-o-y, which was once again below street consensus of 5.7%. The fast retreat since February shows a cooling sign of China's industrial economy. Consumer inflation (CPI), by contrast, accelerated to 1.5% y-o-y in May, on par with market expectation. The drivers came from non-food CPI, which contributed 80% to consumer inflation growth on a year-over-year basis.
PPI slipped three consecutive months to 5.5% y-o-y in May. On a month-over-month basis, it dropped by 0.3% from April headline. This was the second m-o-m correction since April after nine straight months of growth.
Within the breakdown of monthly price change, producer costs in the upstream, including mining (-0.8% m-o-m) and raw material (-0.7% m-o-m), were falling faster than overall PPI (-0.3% m-o-m).
Sector-wise, raw material producers suffered from large pullback of material costs. Ferrous metal mining price (-4.1% m-o-m) fell the most, followed by ferrous metal smelting & pressing price (-1.3% m-o-m) and petroleum, coking & nuclear fuel price (-0.4% m-o-m).
A large month-over-month retreat of material costs is a clear sign of shrinking industrial demand, at least on a marginal basis. In our April PMI note, we already mentioned that producers' re-stocking willingness was low amid inventory pileup of finished goods, implying weakening demand. And don't forget industrial production was a backbone driver of first-quarter GDP. The continued cooling in industrial demand in May could point to slower second-quarter economy.
Picture is mixed when we turn to the case of year-over-year growth. The producer prices in the upstream sectors, albeit slowing, were still flying high compared with last year. Coal (+37.2% y-o-y), petroleum & natural gas (+27% y-o-y), petroleum, coking & nuclear fuel (+22% y-o-y), ferrous metal smelting & pressing (+17.7% y-o-y), and non-ferrous metal smelting & pressing (+13.6% y-o-y) saw double-digit growth in prices.
However, prices in the downstream sectors, such as transport equipment (+1.3% y-o-y), general equipment (+0.5% y-o-y), automobile (-0.2% y-o-y), and power supply (-0.6% y-o-y), were trailing low regardless of high cost growth of upstream sectors. In other words, downstream producers can hardly transfer soaring input costs to end consumers, this in turn encroached their profits.
On the other hand, China’s consumer inflation accelerated to 1.5% y-o-y, up from April headline of 1.2%. The drivers again, came from non-food sectors including healthcare (+5.9% y-o-y), tourism (+4.1% y-o-y), education & entertainment (+2.6% y-o-y), and residence (+2.5% y-o-y). In total, non-food CPI contributed 80% to inflation growth on a year-over-year basis.
Although non-food prices were edging higher, food prices were still in deflation (-1.6% y-o-y). In the breakdown of food basket, prices of eggs (-14.4% y-o-y), pork (-12.8% y-o-y), meat & poultry (-7.8% y-o-y) and fresh vegetables (-6.3% y-o-y) were the key laggards.
Though headline consumer inflation remained at low level, core CPI, with volatile food and energy prices excluded, was steadily moving higher to 2.1% y-o-y in May. Looking ahead, core CPI will continue the reflation pace in light of the rising prices of non-food basket.
PPI tends to recede further as base effect moderates.