Inflation poised for recovery

China's factory-gate inflation is likely to turn positive soon as the economic recovery gains more traction, after the country's producer price index dropped by the slowest rate in 11 months in December, experts said on Monday.

The fall in the PPI, which measures factory-gate prices, narrowed to an 11-month low of 0.4 percent on a yearly basis in December, compared with a 1.5 percent decline a month earlier, the National Bureau of Statistics said on Monday.

On a monthly basis, the PPI rose by 1.1 percent last month, notching the fastest growth level in four years and rose by 0.6 percentage point from November, the NBS said.

"The steady recovery in domestic demand and the sustained rally in international prices of some commodities continued to push up the prices of industrial goods," said Dong Lijuan, an NBS statistician, citing the rising prices of oil, iron ore and nonferrous metals.

The PPI is expected to end the negative growth streak that has lasted for almost a year as early as this month as COVID-19 vaccine rollouts consolidate global recovery expectations and props up commodity prices, said Wu Chaoming, chief economist at Chasing Securities.

The rising factory-gate prices may lead to a further recovery in industrial profits, Wu said, adding that China's inflationary pressure from commodity prices would be controllable this year, while a full recovery in global output remains unlikely.

Factory-gate prices have been gradually recovering since the trough in May, when the PPI registered a 3.7 percent slide, sending the full-year PPI down by 1.8 percent from a year earlier, the NBS said.

The consumer price index, which gauges consumer inflation, is likely to tick up this year as demand further stabilizes, especially for nonfood goods and services, but in a softer manner than factory-gate prices due to the high base of pork prices, experts said.

The CPI rose by 0.2 percent year-on-year in December, compared with a 0.5 percent decline in November, amid the pickup in consumer demand, the cold weather that pushed up food prices, and rising production costs, the NBS said.

The index grew by 2.5 percent in 2020 from the previous year, the bureau said, within the government target of about 3.5 percent.

This month, the CPI growth may bottom out at negative 0.1 percent year-on-year before a gradual rise to around 1.6 percent at the end of the year as demand recovers, Nomura Group economists said in a note.

The temporary negative CPI growth would not point to deflation as it would be mainly driven by pork prices. China's core CPI growth, which excludes volatile food and energy prices, is estimated to come in at 1.1 percent for 2021 amid steady economic recovery, economists at the Japanese financial company said.

The core CPI rose by 0.4 percent year-on-year last month, edging down from 0.5 percent in November, the NBS said.

A mild inflation situation in 2021 is unlikely to trigger major changes in monetary policy, said a Guotai Junan Securities research note.

Nevertheless, some experts warned about the risk of an upside surprise in inflation, especially due to higher commodity prices that could increase the cost of downstream manufacturers.

Though a high base of pork prices and restoring pork supply will mean downward pressure on the CPI, other factors all point to the opposite, said Lynda Zhou, chief investment officer for equities in China at Fidelity International, a global asset manager.

Such factors include recovering global demand, insufficient investment in commodity production, industry leaders' inclination to raise prices and higher rents, she said.

A recent private survey indicated that rising commodity prices have pushed up the cost pressure facing Chinese manufacturers and led to hesitation in hiring decisions in December, according to media organization Caixin.