China deflation fears grow as producer prices sink most in six years

Thu Sep 10, 2015 1:16am EDT
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By Pete Sweeney and Winni Zhou

BEIJING (Reuters) - China's manufacturers slashed prices at the fastest rate in six years in August as commodity prices fell and demand cooled, signaling stubborn deflation risks in the economy and adding to expectations for further stimulus measures.

The producer price index (PPI) fell 5.9 percent in August from the same period last year, its 42nd consecutive month of decline and the biggest drop since the depths of the global financial crisis in late 2009, data showed on Thursday.

The market had expected a decline of 5.5 percent after a drop of 5.4 percent in July.

"The change in PPI is very worrying. It could affect corporate profitability, which in turn could affect consumption and the economy," said Li Huiyong, economist at Shenyin & Wanguo Securities.

"We must step up policy support."

Economists believe China's surprise currency devaluation of nearly 2 percent in mid-August will have little impact on inflation in the near term, in comparison with the effect of sharply lower commodity prices.

The consumer price index (CPI) rose 2 percent from a year earlier to a one-year high, the National Bureau of Statistics said, but the gain was due largely to soaring food prices, not an improvement in economic activity.

Analysts polled by Reuters had predicted CPI would rise 1.8 percent, compared with 1.6 percent posted the prior month.   Continued...

A customer looks at price tags at a supermarket in Huaibei, Anhui province February 10, 2015. REUTERS/Stringer