Focus On The Chinese CPI (Inflation) and PPI

Welcome to the Investors Trading Academy event
of the week. Each week our staff of analysts and educators tries to provide you a better
understanding of a major market event scheduled during the next week. This week we will focus
on Chinese consumer inflation and producers price index. These are better known as CPI
and PPI and are schedule for release on April 10th. China usually releases this data on
a monthly basis in the middle of the month following.
China is likely to cut interest rates or reserve requirements again if consumer inflation drifts
below 1 percent, a member of the central bank’s monetary policy committee said, as he ruled
out more support for the sagging Chinese property market.
Qian Yingyi said policymakers still needed to monitor the inflation data for March and
April to judge if deflation pressures were deepening in the world’s second-biggest economy.
Having seen China lower interest rate twice since November, and also cut the level of
cash banks must hold as reserves last month, most investors assume that China will further
loosen monetary policy in coming months to buoy an economy that is on course for its
worst year in a quarter of a century. China’s annual rate of consumer inflation
quickened to 1.4 percent in February from a 5-year low of 0.8 percent the previous month,
but Qian said the bounce could be a one-off blip as a result of the Lunar New Year holiday.
Just a few weeks ago Chinese Premier Li Keqiang lowered the government’s consumer price inflation
target to around 3% from 3.5% last year, acknowledging disinflationary pressures. It was however
producer prices data released on Tuesday that fuelled worries about the deflationary forces
for the producer sector. The Producer Price Index is a family of indexes that measures
the average change over time in the selling prices received by domestic producers of goods
and services. PPIs measure price change from the perspective of the seller. This contrasts
with other measures, such as the Consumer Price Index (CPI), that measure price change
from the purchaser’s perspective. Sellers’ and purchasers’ prices may differ due to government
subsidies, sales and excise taxes, and distribution costs.
China’s producer price index dropped 4.8% from a year ago, worsening from January’s
4.3% drop and marking three full years of declines. The gauge has remained in negative
territories for 36 consecutive months. Goldman Sachs said the data was below market expectations.
This month authorities would be comfortable with inflation running between 1-2 percent
in current circumstances, compared with the government’s 2015 inflation target of 3 percent.

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