Even as recently as last December, China’s economic situation seemed overwhelmingly muddled. Just across the street, the Consumer Price Index (CPI) sky rocketed with annual growth at 0.8% and the Producer Price Index (PPI) saw a significant drop of -1.9%. On one hand, China’s National Bureau of Statistics (NBS) have released good data. This information has a positive effect on domestic economic policy and benefits international trading partners such as Australia.
The CPI increased by 0.7% after a slight increase of 0.7% in November. That’s a bigger increase than expected by the market, which had projected a 0.9% jump for December. This points to a weak rebound in consumer demand, a persistent issue that’s troubling lawmakers looking to boost the economy. Once again, the PPI has come down—extending a streak of decreasing inflation. Combined with the 2.2% decline in November, this points to continued deflationary pressures persisting within the production sector.
Consumer Price Index Indicators
China’s CPI, a key measure of inflation, increased by 0.8% y/y in December. This is an overall positive sign of improvement in consumer spending, even if it still comes in a little light compared to analyst predictions. The month-over-month CPI increased by 0.2%, bouncing back from a small deflation of -0.1% reported in the month of November.
Consumer prices have increased on an annual basis, year over year. This increase is not nearly fast enough to show a whole lot of economic strength underneath the surface. Analysts will be eagerly watching these trends for clues as to their significance in future monetary policy moves. As long as there are fears about consumer confidence and spending behavior, there may be moves towards additional stimulus packages from the federal government.
Producer Price Index Decline
Unlike the CPI, which was largely muted by rising rents and wages, China’s Producer Price Index plummeted, declining 1.9% year-on-year in December. This followed a 2.2% decline in November. The second being that producers are under significant deflationary pressures. This continued drop is largely driven by lower consumer demand for bulk commodities and factory products.
The recent decline in PPI is significant and could have wider implications for China’s long-term economic stability. It would result in increased cost pressures on profit margins for manufacturers, likely driving employment and investment choices by the industry. The federal government should take targeted steps to reverse this trend and support more robustly the pro-production efforts.
Implications for Australia
Australia’s economic outlook is closely tied to China’s performance given that China is its largest trading partner. The health of China’s economy significantly influences the value of the Australian Dollar (AUD), particularly through the demand for raw materials and commodities like iron ore, Australia’s biggest export.
The release of mixed inflation data from China added to worries in the market. Consequently, the AUD/USD pair remained below 0.6690, reflecting concerns of its harmful effect on trade patterns. The duo recorded a small increase of 0.06% at the time of writing today. It demonstrates just how jumpy the Australian dollar is with respect to changes in Chinese economic data.
Market analysts will eagerly be watching to see how these inflation figures drive commodity prices and, by extension, the AUD. Iron ore prices will fall even more if demand from China stops growing. This worsening would be a kick to the gut to Australia’s trade balance and therefore, economic prosperity.