Inflation in China falls further amid lower commodity prices

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Form Barclays analysts’ comments:

The details show vegetable prices continued to fall, declining 9.4% y/y in September following the 6.9% decline in August. Also, pork prices remain contained, falling 2.9% y/y in September versus the 3.1% decline in August. As a result, food price inflation eased to 2.3% y/y from 3.0% in August, the lowest print since October 2012. Nonfood inflation was lower in September, at 1.3% y/y, given cheaper fuel costs and continued falls in house prices. House price inflation decreased to 1.6%, led by the continued fall in rent prices. YTD, headline inflation was 2.1%, below our annual projection of 2.3%. We forecast inflation of 2.8% in 2015.

PPI deflation worsened in September, led by further declines in mining prices amid overcapacity reductions and the property market correction. The PPI fell 1.8% y/y in September, accelerating from the 1.2% decline in August, and below our forecast (-1.5%) and consensus (-1.6%). The details show that drop was broad based and was led by mining goods (Figure 6). Mining goods prices fell 6.7% y/y in September compared with a 4.4% decline in August; producer prices remain benign on continued overcapacity reductions and corrections in the property sector, along with falling global commodity prices (Figure 7).

Amid falling inflation and generally softer domestic growth, the PBoC lowered the 14d repo rate another 10bp yesterday , consistent with our long-held view of lower rates. Lowering financing costs remains a top policy priority, and the PBoC’s CNY500bn SLF in September at 40-4.5 percent also was aimed at guiding lending rates lower. We continue to expect two 25bp rate cuts from the PBoC, starting in Q4 14.

The weaker-than-expected inflation release has come amid signs of stabilisation in economic activity, but real sector data next week are likely to remain on the softer side. The focus now shifts to monetary data, where we estimate new loans were CNY720bn, marginally below the consensus forecast of CNY750bn. We forecast modest 7.5% y/y growth in industrial production, in line with consensus, and forecast a 16.3% y/y increase in year-to-date FAI (consensus: 16.2%).

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The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.

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