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Chinese inflation meets expectations but remains low

Chinese inflation numbers for December, released on Saturday 9 January, met expectations but remained low.  Headline inflation came in at 1.6%, right in line with economists’ estimates, but producer prices fell a little more than expected at -5.9% year-on-year.

As one can see from the chart, inflation has recovered from the very low rate (below 1%) that occurred at the beginning of 2015, but has also failed to move beyond 2% during the year – spending most of the year around 1.5%.  Inflation has recovered during November and December from October’s 1.3% pace.

Food prices appear to be leading the way higher for inflation, as they rose by 2.7%.  Fresh vegetables ( 7.4%) and pork meat ( 9.5%) rose particularly fast.  Energy prices on the other hand had a dampening impact.  For 2015 as a whole, inflation averaged 1.4%.  Inflation is likely to remain low in China, as commodity prices have continued to fall, but the gradual drop in the yuan after the second half of the year may support the prices of some imported goods.

Producer prices remained in deeply negative territory, as they contracted by 5.9% – a slightly bigger drop than the -5.8% expected.  According to Reuters, it was the 46th straight month of declines for producer prices, which shows the kind of deflationary environment that Chinese manufacturers are faced with (on top of soft growth in their key export markets).

The data had apparently little impact on markets as consumer inflation and producer deflation is not as serious a problem right now in China.  Investors will focus on Chinese trade numbers that will be released on Wednesday; given their importance for growth figures due out the week after this one.  In today’s trading, the People’s Bank of China set the dollar / yuan exchange rate slightly lower (stronger yuan) at 6.5626 from 6.5636 on Friday.  This helped calm some nerves in the foreign exchange market.  The stock market however dropped again as the Shanghai SSE Composite closed down 5.33% compared to Friday’s close.  Still, the drop in the Chinese market did not dissuade stocks around the world from rebounding following some heavy losses the previous week.

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