Rising deflation risks in China after soft CPI data

Deflation risks in China are increasing after softer CPI data released on Tuesday. The October headline inflation number disappointed at 1.3 %y/y, down from 1.6% in September, largely on moderating food prices.

On non-food items, recreation dropped to 1.1% (September: 1.4%), while medical price inflation picked up.

More importantly, core inflation (excluding energy and food) moderated by a further 10bp to 1.5% y/y, a worrying sign of rising deflation risks.

PPI deflation was flat at -5.9% y/y in October, the 44th straight month of contraction.

The producer goods index edged up moderately to -7.6% (September: -7.7%) while the contractions in raw material and mining prices narrowed.

The CPI data come a day after disappointing trade data, which point to more easing measures. Some analysts expect one more RRR cut in the fourth quarter and if inflation continues to slide next month, there is a risk of a 25bp benchmark rate cut before the year-end.

The Australian dollar largely shrugged off downbeat Chinese price data that showed intensifying deflationary pressure. The Aussie stood at $0.7049, recovering from a one-month trough of $0.7016. China is a major trading partner for Australia.

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