China factory gate prices plummet in January, CPI rises

The producer price index (PPI) was down 0.8% on a year earlier

BEIJING (Reuters) - China's January factory gate prices fell more than economists expected, suggesting that flashes of domestic demand that had stoked consumer prices after the zero-COVID policy ended are not yet strong enough to rekindle upstream sectors.

The producer price index (PPI) was down 0.8% on a year earlier, extending the 0.7% drop the prior month and faster than the 0.5% fall tipped in a Reuters poll, even though manufacturing activity returned to growth in January.

The consumer price index (CPI) in January was 2.1% higher than a year earlier, up on the 1.8% annual gain seen in December, data from the National Bureau of Statistics (NBS) showed on Friday, but just shy of the 2.2% increase economists had predicted in a Reuters poll.

CPI was boosted by a seasonal surge in spending over the Lunar New Year festival, with airfares, movie tickets, and travel prices up 20.3%, 10.7% and 9.3% respectively, according to NBS data.

Economists expect the cost of living in China will pick up over the coming months now that its zero-COVID policy has been abandoned, with inflation approaching the target of about 3% that the government set last year.

Analysts expect inflation will remain well behind the high rates seen in Western countries and are not forecasting interest rate hikes.

FACTORY GATE PRICE FALL SURPRISES

Zhou Chao, chief economist at Guotai Junan International, said in a note that the 0.4% monthly decline in PPI was surprising and seemed to suggest that the manufacturing sector was not yet running at full speed.

Advertisement · Scroll to continue The drop in factory gate prices was unexpected because China's economic activity returned to growth in January. The official purchasing managers' index (PMI), which measures manufacturing activity, crossing the 50-point threshold for the first time since September.

Julian Evans-Pritchard, senior China economist at Capital Economics, cited large falls in energy and chemicals prices and waning supply chain disruption as factors behind the factory gate price decline.

On the consumer side, food prices were 6.2% higher in January than a year earlier, after an annual rise of 4.8% seen in December.

Core inflation, which excludes food and energy prices ticked up to 1.2% last month from an annual gain of 0.7% in December.

Senior government officials have repeatedly signalled their intent to harness the consumer power of the country's 1.4 billion people, after economic growth in 2022 slumped to one of its weakest levels in nearly half a century.

China plans to stimulate domestic demand through policy measures this year, but is likely to stop short of splashing out big on direct consumer subsidies, three sources close to the discussions told Reuters last week.

The world's second-largest economy continues to face significant headwinds, including an ailing property sector, weakening external demand for Chinese exporters, and near-record levels of youth unemployment.