Trade war: Chinese factory prices slow more than expected in December, raising threat of deflation

Chinese consumer and factory inflation decelerated more than expected in December, as the slowdown in the economy caused largely by the trade war with the United States reduced demand and put downward pressure on prices.

The rate of inflation in prices charged by producers for their goods at wholesale level plunged in December, to 0.9 per cent from 2.7 per cent in November.

The December result was well below the expectations for a 1.6 per cent rise, according to a Bloomberg survey, and was the weakest since September 2016, when producer prices rose 0.1 per cent.

The deceleration of prices at factory level underscores the problems facing Chinese industry, as weakening demand due to the trade war has forced many to cut prices to sell their goods.

This, in turn, puts pressure on firms’ profitability, reducing their ability to invest and hire new workers.

Factory prices have now decelerated for six months in a row, raising the spectre of another round of price deflation at factory level unless there is a resolution of the trade conflict with the US. Chinese factory prices declined for 54 straight months from March 2012 to August 2016.

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The consumer price index rose 1.9 per cent in December compared with a year earlier, down from 2.2 per cent in November. The December rate was below expectations for a 2.1 per cent rise, according to a Bloomberg survey, and was the lowest since the 1.9 per cent reading last June.

Within December’s consumer price index, food prices rose 2.5 per cent, the same rate as in November, while non-food prices rose 1.7 per cent, down from 2.1 per cent the month before.