(WSJ) Inflation in China picked up in December and is expected to accelerate further in the months ahead as the economy revs up following Beijing’s abrupt dismantling of its zero-tolerance measures to contain Covid-19.
Consumer prices rose 1.8% in December compared with a year earlier, faster than the 1.6% annual rate recorded in November, China’s national statistics bureau said Thursday.
Economists expect the end of China’s draconian Covid restrictions will push up inflation in the country as consumers bid up the price of travel, medicine and other in-demand goods and services, and as companies have struggled with production disruptions caused by waves of sickness.
The question for the world is to what extent China’s faster-than-expected reopening keeps up the pressure on global prices. More persistent global inflation as a consequence of China’s economy roaring back to life would risk delaying the moment at which central banks can halt or even reverse their aggressive interest-rate rises, economists say.
China scrapped most testing and quarantine requirements in early December, the first pivot away from a policy designed to stamp out even the smallest Covid-19 outbreaks that had endured since the pandemic took off in early 2020. On Sunday, Beijing ditched almost all public-health restrictions on international travel, removing one of the most tangible symbols of China’s Covid-era isolation.
The initial effects of the policy pivot have been disruptive. Manufacturing and services activity fell in December, according to official gauges of activity, as businesses struggled with absenteeism and supply-chain interruptions and suppliers and truckers were caught up in the disruption. More recently, indicators such as subway ridership numbers and travel bookings suggest consumers are slowly returning to a semblance of normal life, though spending remains subdued relative to prepandemic norms.
Economists say the impact of these crosscurrents will be higher prices as the economy adjusts. Still, they don’t think China is facing the kind of punishing inflation that took hold in the U.S. and Europe in the aftermath of the pandemic and the war in Ukraine.
Julian Evans-Pritchard, senior China economist at Capital Economics in Singapore, said he expects annual inflation in China to peak around 2.5% some time this year, comfortably below the 3% level that serves as the government’s desired ceiling for inflation. That means the People’s Bank of China isn’t likely to come under pressure to follow other central banks and raise interest rates, he said.
China’s central bank in 2022 nudged down lending rates and funneled billions of yuan in cheap loans to banks and businesses, a policy easing that contrasted with a global central-bank tightening spree led by the U.S. Federal Reserve.
Unlike in China, data Thursday is expected to show annual inflation in the U.S. slowed to 6.5% in December, according to economists polled by The Wall Street Journal, from 7.1% in November and a peak of 9.1% in June. In the nations using the euro, annual inflation was 9.2% in December, down from a peak of 10.6% in October.
The Fed in December raised the benchmark federal-funds rate to between 4.25% and 4.5% and officials signaled that they expect to raise it further to a peak level of between 5% and 5.5% in 2023 and hold it there until some time in 2024, though some economists expect a slowing U.S. economy means a pivot away from tight policy could come sooner.
Economists say the likeliest way China’s reopening would disrupt that timetable or those of other central banks would be through energy prices. Extra demand for oil and natural gas from China would risk keeping energy prices higher for longer, especially in a world of tight supplies caused in part by war in Ukraine.
“That’s the channel through which China’s reopening could have the biggest impact on inflation,” Mr. Evans-Pritchard said. He said he doesn’t think reopening will reverse a gradual easing of global inflationary pressures but that it could slow it.
December’s pickup in inflation matched the 1.8% increase expected by economists surveyed by the Journal. The acceleration in inflation was driven by gains in food prices, data shows. Food prices rose 4.8% on year in December, compared with November’s 3.7% increase. Nonfood prices increased 1.1 % on year, matching November’s gain.
Highlighting the reopening effect, China’s statistics bureau said the cost of travel and entertainment rose in December. The cost of airfares increased 26.7% compared with a year earlier as people rushed to book vacations. Car rental rates also rose.
As the weeklong Lunar New Year holiday, which starts Jan. 21 in China, approaches, the population has taken to the roads. In the first five days of the traditional peak-travel period, which began on Jan. 7, nearly 38 million passengers were traveling over national railways, highways, waterways and airways—a 41% increase from the same period a year earlier though still 49% lower than the level in the same period in 2019, according to official data released Thursday.
Wan Jinsong, a senior official at China’s main economic planning office, the National Development and Reform Commission, said Thursday that the country is confident it can maintain stable prices this year, despite fluctuating global commodity prices and lingering pressures from imported inflation.
Prices charged by companies at the factory gate fell 0.7% in December on the year, albeit at a slower pace than a month earlier. Economists expect producer-price inflation in China to stay subdued because of faltering overseas demand for its manufactured goods as the U.S. and Europe slow.
Source: Wall Street Journal by Jason Douglas Updated Jan. 12, 2023 12:17 am ET
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