China’s Factory Deflation Continues as Covid Outbreaks Spread

(Bloomberg) — China’s factory-gate prices fell more than expected in December, while consumer inflation ticked up as the sudden end to Covid Zero snarled factory operations but eliminated mobility curbs that had weighed on activity for much of the year.

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The producer price index fell 0.7% in December from a year earlier after declining 1.3% in the previous month, the National Bureau of Statistics said Thursday. Economists surveyed by Bloomberg had expected a 0.1% drop.

Consumer inflation gained 1.8% compared to a 1.6% increase in November, in line with economist expectations. Core inflation, which excludes volatile food and energy prices, picked up slightly to 0.7% after staying unchanged at 0.6% for three straight months.

Consumer prices “were generally stable” in December thanks to multiple measures to ensure market supply and price stability, said Dong Lijuan, chief statistician at the NBS. The year-on-year drop in PPI narrowed due to a lower base of comparison with the same period a year earlier.

The data comes during what other economic indicators have suggested was the weakest month for economic activity in China since early 2020 and the beginning of the pandemic. Surging infections following the abrupt reversal of Covid Zero pushed activity off a cliff as people became ill or stayed home for fear of catching the virus. Factory production and new orders in December both contracted the most since April 2022, during Shanghai’s lockdown.

Major cities experiencing outbreaks did not begin to rebound until near the end of the month, high frequency data measuring subway usage and other mobility data showed.

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Consumer prices had been subdued for quite some time as demand remains weak, especially in the services industry. Activity in that sector shrank in December by a magnitude that hasn’t been seen since the initial Covid outbreak about three years ago.

The economic pain isn’t likely to abate quickly. While major cities are showing signs of recovery, Covid infections are expected to spread elsewhere in the country during a busier-than-usual travel rush during the annual key holiday season. Economics, though, expect a faster rebound once infections peak. The median estimate among economists surveyed by Bloomberg is for gross domestic product to expand 4.8% this year, accelerating from an estimated 3% in 2022.

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