China’s inflation fell to 3.0% yoy in May 20129 June, 2012, 10:02. Posted by Zarathustra
China’s CPI inflation continued with its downward trend in May.
The headline consumer prices index inflation fell to 3.0% yoy in May, lowest reading since June 2010, down from 3.4% yoy for the previous month, and below market expectation of 3.2%. On a month-on-month basis, CPI fell by 0.3% in May, down from a fall of 0.1% in the previous month.
Just as mentioned before, we are seeing sharply lower food prices in May, which fell by 0.8% on the month in May, while on a year-on-year basis, food prices inflation is down to 6.4%. Non-food prices increased by 1.4% compared to a year ago, while it remained unchanged on a month-on-month basis.
On another note, producer price index is down to –1.4% yoy, from –0.7% yoy, and again below consensus of –1.1%.
Source: National Bureau of Statistics
The latest data further confirms the underlying weakness of the Chinese economy. The month-on-month CPI inflation is in negative territory for 2 consecutive months. While food prices has been the major factor in driving inflation, this no longer appears to be a great concern. At the same time, the producer price index is also believe consensus estimates, and appears to be very deflationary. These are further evidence to support the idea that China is already in a debt deflationary environment. The lower-than-expected inflation figure also explains the action two days ago by the People’s Bank of China to cut interest rates.
We believe inflation will continue to trend lower due to the underlying weakness of the economy pointing to a sluggish aggregate demand while the economy is already in a over-capacity situation.