Inflation registers 18-month low as supplies stable, production resumes

China's consumer inflation eased in March to an 18-month low, leaving room for further macroeconomic policy stimulus in the coming months, analysts said on Tuesday.

China's consumer price index, a main gauge of inflation, climbed 0.7 percent from a year earlier in March, down from 1 percent in February, said the National Bureau of Statistics.

Meanwhile, China's factory-gate prices registered an annual fall for the sixth consecutive month in March. The producer price index was down 2.5 percent from a year earlier in March, compared with a 1.4 percent annual contraction in February, the NBS said.

Dong Lijuan, an NBS statistician, said consumer inflation eased in March due to the continued resumption of production and economic activity as well as sufficient market supply, while the fall in factory-gate prices was affected by a high comparison base from the previous year.

Lu Ting, chief China economist at Nomura, warned that the falling inflation readings in March suggest that the post-COVID recovery momentum remains weak.

"While in-person services and (people's) mobility have clearly displayed a strong recovery, the property market's rebound seems to have been short-lived, while exports continue to contract," Lu said.

Looking ahead, he said his team expects China's CPI to rise 0.3 percent year-on-year in April, as food prices are likely to continue declining sequentially, while core inflation remains subdued on falling PPI inflation. Due to the still-high comparison base last year, the PPI could decline 3 percent year-on-year in April.

For the full year, Lu said his team cut their 2023 annual forecast of CPI growth to 1.3 percent from 2.6 percent, and this downward revision reflects the weak recovery, normalized supply chains, contracting exports and other disinflationary pressures on core inflation, such as the ongoing price war among auto dealers.

After China's CPI increased by 2 percent in 2022, China has set an annual consumer inflation target of around 3 percent for 2023.

Looking ahead, Lu said his team expects policymakers to step up support in the coming months, as the low inflation readings could provide more room for stimulus.

"The People's Bank of China (China's central bank) just cut the reserve requirement ratio by 0.25 percentage point at the end of March. However, Beijing still has no appetite to launch a massive stimulus over concerns of distortions and financial risks," he added.

Zhou Maohua, an analyst at China Everbright Bank, said China's mild inflation level provides room for further stimulus, and the country has plenty of space to step up monetary policy support.

While some experts worry that disinflationary pressure remains sizable, Zhou said China will not likely see deflationary risks in the coming months, and the country will continue to keep prices stable and controllable this year.

He said China's economy was picking up and stabilizing in the first quarter amid stronger policy support and a gradual recovery of domestic demand.

There have been signs of improved monetary conditions. China's broad money supply, or M2, stood at 281.46 trillion yuan ($40.88 trillion) by the end of March, up 12.7 percent from a year earlier, indicating accommodative monetary conditions to support the economy, the PBOC said on Tuesday.

China's credit growth continued to recover in March as new yuan-denominated loans totaled 3.89 trillion yuan, up by 749.7 billion yuan year-on-year. And the nation's increment in aggregate social financing — the total amount of financing to the real economy — came in at 5.38 trillion yuan in March, up by 707.9 billion yuan compared with the same period last year, the central bank added.